Alerian is frequently asked to qualify MLP distribution growth numbers. What do they mean in a larger context? How does MLP distribution growth compare to the growth of the broader economy? Is there any correlation between distribution growth and GDP?
The chart above answers some of those questions. It depicts the weighted average annual distribution growth of the Alerian MLP Index (AMZ) compared against the annual growth of US Gross Domestic Product (GDP) in current dollars. Over the past 10 years, MLP distributions have grown almost twice as fast as the broader economy.
Many investors use MLPs on an ad hoc basis in their search for income. However, distribution growth contributes nearly as much to MLP total returns as the frequently cited MLP yield. Successful MLPs are able to grow their distributions quarter after quarter regardless of the broader macro environment. During the 2005-2008 time period, average distribution growth rates of 9%-11% were driven by the number of MLPs which had their IPOs in that period. Smaller companies have a relatively easier time achieving above-average growth because they have a smaller asset base (and cash flow stream) off which to build.
The following tables provide an example of how $5 in income would have grown over the past 10 years, based on whether it grew at the same pace as AMZ distributions, or at the pace of GDP.
During the financial crisis, through conservative stewardship of capital, most MLPs were able to maintain or grow their distributions even when the US economy, as measured by GDP, shrunk considerably. Overall, a rising tide lifts all boats, and while MLPs are able to grow their distributions despite broader weakness in the economy, the greatest growth occurs when the country does well as a whole.