Buckeye Partners: 20-Plus Years of Dividend Growth and a Dividend Yield of 7.3%
A high dividend yield is often the first thing that income investors look for in a stock. The second thing would probably be consistent dividend increases. Thus, an ideal income opportunity would be a stock that provides a high current dividend that can grow in the future.
I like to call these plays “dividend retirement boosters” (DRBs). Why? Well, because of their ability to speed up the wealth-building process through high, growing, and solidly supported income.
Now, of course, DRBs aren’t very common, nor are they easy to find; if they were, everyone would be gobbling them up. But luckily, our team at Income Investors is always on the hunt for them.
So what exactly are we looking for? Well, it’s simple. For a stock to be considered a DRB, it must:
1) Sport a dividend yield above seven percent,
2) Have at least 10 consecutive years of annual dividend increases, and
3) Generate boatloads of cash flow to easily cover its payouts.
From the research I’ve conducted so far, Buckeye Partners, L.P. (NYSE:BPL) exhibits all of those characteristics. Let’s take a closer look at this DRB.
Eye on Buckeye
For investors who aren’t familiar with Buckeye Partners, it transports and stores liquid petroleum products. In fact, it is one of the largest independent liquid petroleum pipeline operators in the United States in terms of volumes delivered, with roughly 6,000 miles of pipeline.
Buckeye is also one of the biggest terminalling and storage operators in the U.S. in terms of capacity. Its terminal network comprises more than 120 liquid petroleum products terminals, with total storage capacity of over 110-million barrels across its portfolio of pipelines.
This massive network of terminals allows Buckeye to facilitate the flow of crude oil and refined petroleum products globally. In other words, the company gives its customers a connection between supply areas and market centers through some of the world’s most significant storage hubs.
Thus, Buckeye’s general strategy is to 1) build and operate high-quality, strategically-located assets, 2) maintain the integrity of its pipeline and storage assets, and 3) pursue cash flow-generating acquisitions.
So, how is Buckeye performing on these objectives? Well, judging from the company’s recent results, I’d say pretty darn well.
In 2016, for example, Buckeye reported operating income of $548.7 million. That was up nicely from $438.4 million in 2015. In fact, the company generated record earnings and cash flows in 2016. We don’t always need to see our companies generating record-level results, but it’s great to see when it does happen.
All of Buckeye’s business segments are performing well. Strong demand allowed the company to increase the utilization of its storage assets to a solid 96%—above the industry average. And despite the decline in commodity prices, Buckeye managed to increase volumes in both its pipelines and terminals.
Of course, the most significant move that Buckeye made in 2016 was its 50% equity acquisition of VTTI. VTTI is one of the largest global marine terminal businesses in the world, and it immediately gives Buckeye a worldwide presence.
“The 2016 results for Buckeye demonstrate the benefits of our growing geographic reach, new logistics services and a more diversified product slate,” said Chairman and Chief Executive Officer Clark Smith. “This increased diversity positions Buckeye to deliver strong results in any commodity cycle.” (Source: “Buckeye Partners’ (BPL) CEO Clark Smith on Q4 2016 Results – Earnings Call Transcript,” Seeking Alpha, February 10, 2017.)
Cash Flow Solid
But what is more important for income investors? Well, it is the fact that Buckeye’s strong performance and acquisition activity translate directly into consistent distributions. After all, it is a company’s dividend distributions—not accounting income—that ultimately ends up in our pockets.
In Q4, management bumped its quarterly distribution to $1.2375. That represents a 4.2% increase over the Q4 payment in 2015. In fact, Buckeye has paid uninterrupted distributions to shareholders in each quarter for the past 30 years.
What is even more impressive is that the distribution has increased for more than 20 consecutive years. As income investors know, that puts Buckeye in rare company among dividend payers.
Given the quality of Buckeye’s portfolio and distribution coverage above 1.0, I wouldn’t expect that distribution growth to slow significantly.
“[The VTTI] acquisition provides us a platform to access the growing international terminalling and storage markets,” said Smith. “The contribution from these investments combined with the underlying strength of our diversified asset portfolio position us to continue to increase our quarterly distribution by $0.0125 per quarter for the remainder of 2017.” (Source: Ibid.)
High Dividend Yield at a Good Price
That brings us to Buckeye’s stock price, which has underperformed significantly over the past year.
Why the worry? Well, analysts are mainly concerned over the impact that rising interest rates will have on the company’s high dividend yield. In other words, higher interest rates would make the dividend yield on BPL less attractive. There is also uncertainty over the VTTI stake.
But while there are certainly risks surrounding Buckeye, I think the current 7.3% dividend yield factors them in. After all, that yield is much higher than the energy industry average (5.3%), as well as the S&P 500 (2.1%).
Considering how reliable and consistent Buckeye’s dividend is, I’d only expect that spread to narrow over time.
The Bottom Line on Buckeye Partners
There you have it, my fellow income investors: a few bullish reasons to consider adding this DRB, Buckeye Partners, to your income portfolio.
As is always the case, don’t see this article as formal “buy” recommendation. Instead, view it as a jump-off point for further research. Because while Buckeye Partners’ seven-percent-plus dividend yield seems pretty stable at this point, it’s crucial that investors monitor interest rates, petroleum demand, and especially the VTTI investment to ensure it remains that way.
At the moment, though, Buckeye Partners, L.P. should definitely be on your watchlist.
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