While Not Perfect, This 14.2% Yielder Deserves a Look
Why I’m Checking Out This Double-Digit Yielder
If you’ve been following high-yield stocks, you’ll know that, in today’s market, most of them are not perfect.
And this shouldn’t come as a surprise. The average S&P 500 company pays less than two percent. If there’s a solid 10% yielder, income investors would rush to buy it. And by bidding up a company’s stock price, its yield would drop.
In other words, if a company’s yield stays at an elevated level, there must be some reason why investors are staying on the sidelines.
Still, that doesn’t mean we should ignore ultra-high yielders completely. NGL Energy Partners LP (NYSE:NGL), for instance, could be worth a look.
Headquartered in Tulsa, Oklahoma, NGL is a master limited partnership (MLP) with diverse midstream operations in the energy sector. The partnership provides a wide range of services to producers and end users, including transportation, storage, blending, and marketing of crude oil, natural gas liquid (NGL), refined products, renewables, and water solutions.
Right now, NGL Energy Partners stock has a quarterly cash distribution rate of $0.39 per common unit, which, at its current price, equates to a jaw-dropping yield of 14.2%. (Source: “Distribution History,” NGL Energy Partners LP, last accessed December 16, 2019.)
Looking further back at NGL stock’s distribution history, you’ll see why this double-digit yielder is less than perfect.
In early 2016, NGL had a quarterly cash distribution rate of $0.64 per common unit. In April of the same year, management announced several strategic actions, one of which was a 39% reduction of the partnership’s quarterly distribution rate to $0.39 per common unit. (Source: “NGL Energy Partners LP Announces Investment From Funds Managed by Oaktree Capital Management, L.P., Declares Quarterly Cash Distribution and Provides Partnership Update,” Business Wire, April 21, 2016.)
What this means is that, while NGL Energy Partners stock looks very generous in terms of its yield, the current payout level was actually the result of a distribution cut. And for investors who want to live off the return of an income portfolio, few things are worse than a dividend cut.
Recently, though, things seem to have improved for the company. In the second quarter of its fiscal-year 2020, which ended September 30, 2019, NGL generated $119.0 million in adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) from continuing operations. The amount represented a 29.8% improvement from a year ago. (Source: “NGL Energy Partners LP Announces Second Quarter Fiscal 2020 Financial Results,” NGL Energy Partners LP, November 8, 2019.)
Distributable cash flow, a critical measure of an MLP’s performance, came in at $59.0 million for the reporting quarter. Again, this marked a sizable year-over-year improvement because, in the second quarter of NGL’s fiscal-year 2019, its distributable cash flow was a mere $36.5 million.
The most impressive part is what the partnership is on track to achieve in terms of distribution coverage. In NGL’s fiscal-year 2019, it earned $188.0 million in distributable cash flow while paying $194.0 million in actual cash distributions. So the partnership didn’t quite cover its payout. (Source: “Investor Presentation November 2019,” NGL Energy Partners LP, last accessed December 11, 2019.)
This fiscal year, though, management expects the MLP to generate $240.0 to $315.0 million in distributable cash flow. Meanwhile, NGL is on track to pay $198.0 million in cash distributions for the year. That should result in a significant improvement in the distribution coverage ratio to the range of 1.2 times to 1.6 times.
Note that, by the end of September, the partnership already achieved a trailing 12-month distribution coverage ratio of 1.13 times. Going forward, NGL is targeting an even stronger 1.3 times coverage.
Remarking on NGL stock’s distribution policy and coverage, chief financial officer Trey Karlovich said the following during the partnership’s latest earnings conference call: “We have maintained our distribution this quarter, and do not expect any changes to the distribution at this time. Our coverage has continued to increase.” (Source: “NGL Energy Partners LP (NGL) Q2 2020 Earnings Call Transcript,” The Motley Fool, November 8, 2019.)
Bottom Line on NGL Energy Partners LP
At the end of the day, as is the case with most ultra-high yielders, I wouldn’t call NGL Energy Partners stock a slam dunk.
However, if the partnership keeps traveling along management’s guidance and improves its distribution safety, its massive yield would become a lot more attractive to income investors.