With Another Distribution Increase, DKL Stock Yields 10.3%
The Most Overlooked High-Yield Stock in the Market?
Delek Logistics Partners LP (NYSE:DKL) never really made headlines in the financial media. But the stock deserves investors’ attention for a very simple reason: it offers a payout that dwarfs 99% of companies in today’s market.
Last week, Delek Logistics Partners declared a quarterly cash distribution of $0.79 per unit, which represented a 2.6% increase sequentially and a 10.5% increase year-over-year. The new distribution will be paid on November 9, 2018 to holders of record as of November 2. (Source: “Delek Logistics Partners, LP Increases Quarterly Cash Distribution to $0.79 per Common Limited Partner Unit,” Delek Logistics Partners LP, October 23, 2018.)
Trading at $30.75 apiece, DKL stock is offering a yield of 10.3%.
The big question, of course, is whether the payout is safe. So let’s take a look at what the partnership does to make its money.
Delek Logistics Partners LP
Delek Logistics Partners LP is a master limited partnership headquartered in Brentwood, Tennessee. It was created by Delek U.S. Holdings Inc (NYSE:DK) to acquire, own, operate, and construct crude oil and refined products logistics and marketing assets.
The relationship with its sponsor provides the company with a unique advantage. Delek U.S. is the seventh-largest independent refiner in the country, with over 300,000 barrels per day of crude throughput capacity. DKL provides an investment platform to unlock logistics value in this Permian-based refining system.
At the same time, having a prominent refiner as the sponsor also provides drop-down acquisition opportunities for the partnership. Earlier this year, Delek Logistics Partners added Big Spring Logistics’ assets to its portfolio, which would boost its annualized earnings before interest, tax, depreciation and amortization (EBITDA) by approximately $40.0 million. Going forward, the potential drop-down of Krotz Springs assets could bring another $30.0 million to $34.0 million to Delek Logistics Partners’ annual EBITDA. (Source: “Investor Presentation,” Delek Logistics Partners LP, last accessed October 24, 2018.)
Right now, Delek Logistics Partners’ portfolio consists of crude and product transportation pipelines, crude oil gathering systems, storage facilities, and light product terminals, among others. These assets are largely backed by multi-year contracts with firm commitments, which would allow the generation of stable cash flows, despite commodity price volatility.
To give you an idea, nearly 70% of the partnership’s gross margin in the second quarter of 2018 came from minimum volume commitments.
DKL Stock: Growing Distributions Backed By Improving Financials
Just take a look at DKL stock’s distribution history and you’ll see how solid the business is.
We know that oil prices crashed big time in the summer of 2014 and have yet to make a full recovery. Despite this major commodity price headwind, Delek Logistics Partners, which went public in 2012, has delivered 23 consecutive distribution increases since its IPO.
The best part is, the partnership has growing financials to back its rising cash payouts. In the second quarter of 2018, Delek Logistics Partners generated $33.5 million in distributable cash flow. Since the partnership paid total distributions of $25.0 million for the quarter, it achieved a distributable cash flow coverage ratio of 1.34 times. (Source: “Delek Logistics Partners, LP Reports Second Quarter 2018 Results,” Delek Logistics Partners LP, August 7, 2018.)
This is particularly impressive given that in the second quarter of last year, the company’s distributable cash flow coverage ratio was 1.06 times. So despite offering growing payouts, the partnership actually has an expanding margin of safety.
Going forward, Delek Logistics Partners LP is targeting a minimum annual distribution per unit growth of 10% through 2019. So for investors in DKL stock, the best could be yet to come.