BPL Stock: A High-Dividend Energy Play Yielding 8.9%
BPL Stock: A Top Dividend Stock to Consider
Today’s column highlights one of the best energy plays for income investors. The company has been paying uninterrupted dividends for more than three decades and currently offers an attractive dividend yield of 8.9%.
I’m looking at Buckeye Partners, L.P. (NYSE:BPL), a master limited partnership based in Houston, Texas.
When it comes to investing in the energy sector, risk management should be a priority. Just take a look at how energy companies have been doing over the last few years and you’ll see what I mean.
Since the downturn of oil and gas prices began in the summer of 2014, quite a few energy companies have fallen deep into the doldrums. Production cuts and layoffs were constantly in the news.
And that’s why Buckeye is special. The partnership has built a business that’s capable of generating stable cash flows through commodity prices cycles. How is that possible?
Well, because while oil drillers are price takers in the commodity business, Buckeye does not actually operate any oil wells. In fact, the partnership does not have any exploration or production activity. Its focus is entirely on providing midstream services.
Buckeye owns and operates one of the largest independent liquid petroleum products pipeline systems in the U.S. in terms of volumes delivered. It is also one of the largest independent terminaling and storage operators in the country in terms of capacity available for service.
In other words, energy companies pay Buckeye a fee to transport and store energy products, meaning Buckeye does not have any direct commodity price exposure.
According to the partnership’s latest investor presentation, 98% of Buckeye’s adjusted earnings before interest, tax, depreciation and amortization (adjusted EBITDA) in the first half of 2017 was generated from its fee-based operations. (Source: “Barclays CEO Energy-Power Conference,” Buckeye Partners LP, last accessed September 20, 2017.)
This means as long as there are energy products for Buckeye to move and store, the partnership will be able to keep making money regardless of what oil and gas prices are doing.
The chart below shows Buckeye’s adjusted EBITDA for the past several years:
Source: “Barclays CEO Energy-Power Conference,” Buckeye Partners LP, last accessed September 20, 2017.
In 2013, the partnership generated $648.8 million in adjusted EBITDA. Then oil prices plunged, but Buckeye actually earned quite a bit more: $763.6 million in 2014. The number grew to $868.1 million in 2015 and increased again to $1.03 billion in 2016.
The growth continues to this day. In the 12-month period ended June 30, 2017, Buckeye generated a record $1.07 billion in adjusted EBITDA. By growing its business through one of the biggest downturns in commodity prices, Buckeye has shown why it is a top dividend stock.
Indeed, with a growing business, Buckeye stock is able to pay an increasing dividend to income investors. The partnership has raised its per-unit distribution rate at least once a year for more than 20 years and has never missed a single payment since its initial public offering in 1986. (Source: “Distribution History,” Buckeye Partners LP, last accessed September 20, 2017.)
The partnership has also improved its risk profile by diversifying its business. In 2010, 97% of the products transported and stored by Buckeye were refined products such as gasoline, diesel, jet fuel, and heating oil. So far into 2017, refined products only accounted for 66% of the partnership’s business. This is because Buckeye also has a 22% crude oil/condensate business and a 12% “other products” business, which mainly includes fuel oil, butane, propylene, diluent and asphalt. By increasing its product diversification, Buckeye limits its exposure to any particular category.
With a growing fee-based business, a generous dividend policy, and increasingly diversified operations, Buckeye Partners LP is a top dividend stock for income investors.