With the energy sector ranking as the best-performing group in the S&P 500 again this year, investors are being rewarded, and in some cases, strong returns are being enhanced by stout dividends.
For example, the Virtus InfraCap MLP ETF (NYSEArca: AMZA) is higher by almost 29% year-to-date while yielding an impressive 7.95%. However, there’s more to the midstream energy shareholder rewards than just big dividends. That includes buybacks.
Energy infrastructure companies, including some AMZA components, have increasingly strong balance sheets and are generating more cash, enabling those firms to pay and grow dividends while also repurchasing their own shares.
“Energy infrastructure companies repurchased $370 million(1) of their equity in aggregate during the first quarter. This represents a slowdown from the total repurchases seen in 4Q21 and 3Q21 of $650 million and $800 million, respectively, but is above the $300 million spent in 2Q21. Combining the last four quarters, energy infrastructure companies have spent $2.1 billion on equity repurchases. For context, the total North American energy infrastructure market capitalization was $603 billion at the end of the first quarter,” wrote Alerian analyst Stacey Morris.
Some familiar names among master limited partnerships (MLPs) showed commitments to buyback efforts in the first three months of 2022.
“Several companies across the energy infrastructure landscape were active with their repurchase programs in 1Q22, albeit at mostly modest amounts. Leading the way, MPLX (MPLX) spent $100 million on repurchases in the quarter. Targa Resources (TRGP) and Magellan Midstream Partners (MMP) both spent $50 million on buybacks, while Cheniere (LNG), EnLink (ENLC), and Plains All American (PAA) repurchased approximately $25 million of their equity,” added Morris.
That’s relevant to AMZA investors and those considering the fund because the ETF isn’t just actively managed, it’s concentrated. Its top three holdings combine for about 48% of the fund’s roster. That includes Magellan Midstream and MPLX, which combine for almost 32%.
Crestwood Equity Partners (NASDAQ:CEQP) and Energy Transfer (NYSE:ET) are also among the AMZA member firms buying back equity. Following a bygone era of profligate share issuance, investors are cheering buybacks by AMZA member firms.
“One of the most poignant changes for midstream investors may be the proliferation of buyback programs, particularly given a history of frequently tapping equity markets to fund growth projects. The evolution of midstream/MLPs from frequent equity issuances to self-funding equity to now buying back equity marks a notable transformation,” concluded Morris.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.