We present a hydrodynamic theory for systems of dipolar active Brownian particles which, in the regime of weak dipolar coupling, predicts the onset of motility-induced phase separation (MIPS), consistent with Brownian dynamics (BD) simulations. The hydrodynamic equations are derived by explicitly coarse-graining the microscopic Langevin dynamics, thus allowing for a quantitative comparison of parameters entering the coarse-grained model and particle-resolved simulations. Performing BD simulations at fixed density, we find that dipolar interactions tend to hinder MIPS, as first reported in [Liao et al., Soft Matter, 2020, 16, 2208. Here we demonstrate that the theoretical approach indeed captures the suppression of MIPS. Moreover, the analysis of the numerically obtained, angledependent correlation functions sheds light into the underlying microscopic mechanisms leading to the destabilization of the homogeneous phase.