Plains All American Pipeline (PAA 6.24%) already offers investors a lucrative income stream. The master limited partnership's (MLP) distribution yield is currently over 7%, which is well above the S&P 500's 1.2% dividend yield.

That payout is heading even higher in 2025 after the MLP recently signed a series of deals to increase its cash flow. That's giving the oil pipeline company the fuel to boost its distribution by 20% this year.

Going on a shopping spree

Plains All American Pipeline recently unveiled that it's making three bolt-on acquisitions to start the year. It's buying:

  • Ironwood Midstream Energy: The MLP is buying Ironwood for $475 million. It owns a gathering system in the Eagle Ford Basin. The deal should close in the first quarter.
  • Delaware Basin crude oil gathering: The company's Permian Basin joint venture has acquired Medallion Midstream's Delaware Basin crude oil gathering business for $160 million ($105 million net to Plains).
  • Midway Pipeline: Plains has acquired the remaining 50% interest in Midway Pipeline LLC for $90 million.

This trio of acquisitions will enhance the company's crude oil footprint in the Permian, Eagle Ford, and Mid-Continent regions. CEO Willie Chiang noted they are "an excellent strategic fit for Plains and allow us to progress our efficient growth strategy by adding high-quality assets adjacent to our existing integrated footprint."

Further, the $670 million in deals will create immediate value for investors by delivering sustainable earnings and distributable cash flow to the company. That's allowing it to accelerate the return of capital to investors by increasing its distribution by another 20%.

In addition to that distribution increase, the MLP has agreed to purchase 12.7 million outstanding Series A Preferred Units for $330 million (plus accrued and unpaid distributions). That's 18% of this series of its preferred units. These repurchases, which it expects to close by the end of the month, will save it money by reducing cash distributions paid to preferred investors.

Plains All American can easily fund these transactions with its strong balance sheet. After completing these acquisitions, the MLP expects its leverage ratio will be at or below the low end of its 3.25x to 3.75x target range. That will provide it with significant balance-sheet flexibility.

Becoming an income-growth machine

Plains All American Pipeline has come a long way in recent years. The MLP had to cut its distribution a couple of times in the past to retain more cash to fund expansion projects and strengthen its balance sheet. That strategy has worked.

Its leverage ratio has improved by 22% since 2021, while its earnings have grown at an 8% compound annual rate over the past three years. The company has also generated significant and growing free cash flow ($7.5 billion in cumulative adjusted free cash flow since 2021).

That combination of rising earnings, growing free cash flow, and a lower leverage ratio has given Plains All American Pipeline the flexibility to return more cash to investors. The MLP has grown its distribution at a 21% compound annual rate over the last three years from its reset level.

Its goal heading into 2025 was to deliver annual distribution growth of $0.15 per unit until it reaches its targeted payout ratio (more than 10% annually from last year's level). It's going to significantly exceed that level this year. It's boosting its payout by $0.25 per unit, or 20%, thanks partly to the accretion from its acquisitions and preferred-unit repurchases.

Plains All American Pipeline has several growth drivers that could support distribution growth at or above its targeted level in the future. These catalysts include:

  • Organic expansion: Plains plans to invest $300 million to $400 million per year on high-return organic expansion projects that provide additional earnings.
  • Streamlined operations: The company expects tariff increases on existing pipelines, higher utilization rates, market opportunities, and cost controls to boost the margins of its existing assets, supplying it with incremental income.
  • Bolt-on mergers and acquisitions (M&A): Plains expects to continue making accretive acquisitions as opportunities arise. It has a robust opportunity to buy assets from private equity funds, existing joint venture partners, and other midstream companies.
  • Capital optimization: The MLP entered the year with about $2.6 billion of preferred units that it could repurchase or refinance in the future, which would reduce future cash distributions to these investors.

These catalysts and the company's conservative payout ratio should support continued distribution increases.

A high-octane income stream

Plains All American Pipeline provides its investors with a lucrative income stream that's growing rapidly. It enhanced its ability to increase its payout this year by making several accretive deals. Meanwhile, it has plenty of fuel to continue growing its payout at an attractive rate in the future. These factors make Plains All American Pipeline look like an attractive option for income-seeking investors.