Among investors, Antero Midstream (NYSE: AM) is a relatively unknown gas pipeline company servicing Pennsylvania, Ohio, and West Virginia.

Investors who seek sky-high yields are aware of the stock, however, thanks to its 16.2% yield.

It’s difficult to analyze the dividend safety of this company because it does not have a long history in its current form.

Though the company got its start in 1998, it has undergone many major transitions along the way.

The most recent was in March of last year when the parent company acquired all of the master limited partnership (MLP). That resulted in a very large increase in free cash flow.

So to compare apples to apples, we can look at only the results from 2019 and this year’s forecast. To look further back than 2019 wouldn’t make sense.

Last year, Antero’s free cash flow was $622 million. But it’s expected to drop down to $487 million this year.

That’s a problem because not only do we want to see free cash flow moving in the other direction, but also, in 2020, free cash flow is unlikely to cover the dividend.

Dividend History

Antero has a short but solid dividend-paying track record. It began paying shareholders in 2015, and it raised the dividend every quarter.

After the acquisition of its MLP, it nearly doubled the dividend. It boosted the payout by $0.02 in July 2019 to $1.23 per share, and it has kept the dividend at that level since.

To put it frankly, Antero Midstream cannot afford its current dividend.

The company just raised $550 million by issuing debt. Some of that cash may be used to pay the dividend, but that’s not what we want to see.

We always prefer that our companies generate more than enough free cash flow to cover the dividend. We don’t want to rely on financial engineering to pay shareholders.

And with a 16.2% yield, Antero could even cut the dividend in half and still offer an attractive yield to shareholders.

I’m not sure what percentage dividend cut is coming, but investors should be ready for one in the next year.

Dividend Safety Rating: F