BP Midstream Partners LP: At Last, a 9% Yield You Can Count On
A Rare Find Among Ultra-High Yielders
It’s no secret that in times of market uncertainty, dividends can provide investors with peace of mind. It’s also no secret that, when everything else is equal, investors would want to collect a yield that’s as high as possible.
But in reality, everything else is not equal. Dividend stocks differ in many ways other than their yields. And the general pattern has been that the higher the yield, the riskier the payout.
So when BP Midstream Partners LP (NYSE:BPMP) first came across my desk, I was highly skeptical. But after taking a close look, I realized that this could be one of the few high-yield stocks that is actually worth considering for income investors.
Let me explain.
BP Midstream Partners LP
BP Midstream Partners is a master limited partnership (MLP) headquartered in Houston, Texas. It was created by BP Pipelines—an indirect wholly owned subsidiary of BP plc (NYSE:BP)—to own, operate, develop, and acquire pipelines and other midstream assets.
Today, BP Midstream Partners LP’s portfolio consists of pipelines for crude oil, natural gas, refined products, and diluent, as well as terminals for refined products. Through these assets, the partnership helps BP, its affiliates, and third-party customers transport onshore and offshore production to key refining markets and trading/distribution hubs.
BP Midstream Partners completed its initial public offering (IPO) in October 2017, so it is a relatively new name to stock market participants. Yet, in less than two years after BPMP stock’s IPO, the partnership has already returned a tremendous amount of cash to investors.
You see, when BP Midstream Partners went public, its first cash distribution was $0.18 per unit. That represented a prorated portion of the partnership’s minimum quarterly distribution of $0.27 per unit. (Source: “Dividend History,” BP Midstream Partners LP, last accessed August 23, 2019.)
Since then, the company has increased its payout every single quarter.
The latest distribution hike came in July, when the board of directors of BPMP’s general partner declared a quarterly cash distribution of $0.32 per unit for the second quarter of 2019. That amount represents a 3.6% increase sequentially and an 18.8% increase year-over-year. The dividend was paid on August 14 to unitholders of record as of July 31. (Source: “BPMP declares increased second quarter 2019 distribution,” BP Midstream Partners LP, July 17, 2019.)
This also means, since BP Midstream Partners went public, its per-share payout has grown by 23.3% from its minimum quarterly distribution.
As of this writing, BP Midstream Partners stock trades at $14.43 apiece. So its most recent cash distribution translates to an annual yield of nine percent.
Is the Distribution Safe With BPMP Stock?
Of course, as I mentioned earlier, dividends of ultra-high-yielding stocks tend to be on the riskier end. So before taking out your wallet, we need to find out whether the partnership has enough resources to support its outsized payouts.
BP Midstream Partners reports something called cash available for distribution. It’s calculated by taking adjusted earnings before interest, tax, depreciation and amortization (EBITDA), adding net adjustments from volume deficiency agreements, then subtracting maintenance capital expenditures, net interest paid/received, cash reserves, and income taxes paid.
To see whether BP Midstream Partners stock’s payout is safe, all you need to do is compare its cash available for distribution to the partnership’s actual cash payout in a given reporting period.
In 2018, BP Midstream Partners generated $143.9 million in cash available for distribution while declaring actual cash distributions of $118.7 million. That translated to a distribution coverage ratio of 1.21 times, meaning the partnership generated 21% more cash than what was needed to meet its distribution obligations for the year. (Source: “BP Midstream Partners LP (NYSE: BPMP) Fourth Quarter and Full Year 2018 Results,” BP Midstream Partners LP, February 28, 2019.)
Fast forward to this year and things look equally solid.
BP Midstream Partners reported earnings on August 8. In the second quarter of 2019, the partnership generated $42.9 million in cash available for distribution. Considering that BPMP declared $34.3 million in total cash distributions during the quarter, it achieved a distribution coverage ratio of 1.25 times. (Source: “BP Midstream Partners LP (NYSE: BPMP) Second Quarter 2019 Results,” BP Midstream Partners LP, August 8, 2019.)
In the first half of this year, BP Midstream Partners had a distribution coverage ratio of 1.23 times.
However you look at it, the partnership has been covering its payout with ease. And keep in mind that we’re talking about nine-percent yielder here. When it comes to stocks yielding close to double-digits, it’s not every day that you see a margin of safety as wide as what BPMP stock has.
Will This High-Yield Stock Pay Investors Even More?
The best part about BP Midstream Partners LP is that it’s not done with its distribution hikes. In the company’s latest earnings conference call, the partnership’s Chief Executive Officer Robert Zinsmeister said, “last year, we delivered mid-teens distribution growth and we are on track for delivering the same again this year.” (Source: “BP Midstream Partners LP (BPMP) CEO Robert Zinsmeister on Q2 2019 Results – Earnings Call Transcript,” Seeking Alpha, August 8, 2019.)
In other words, if investors get BP Midstream Partners stock today, they can look forward to earning a yield on cost of higher than nine percent in the months ahead.