A High-Yield Stock You Likely Haven’t Considered
There are many reasons why investors should consider a particular company. In my opinion, though, one reason significantly outweighs the others—insider ownership.
You see, no matter how brilliant Wall Street analysts are, they usually don’t know as much about a company as the company’s management. And that’s why management is often referred to as insiders.
Of course, if you ask management during an earnings conference call, you are most likely going to get an optimistic answer. Think about it, they get paid to do their job, why would they say negative things about their employer?
So here’s the situation: Management knows a lot more about their business than outside analysts, but the information they reveal may not always be accurate. Is there a way to get some insight on what they really think about their company?
Well, you can always check whether they put their money where their mouth is.
In other words, investors should pay attention to insider ownership.
And in this article, I’m going to show you a business that insiders love: Crestwood Equity Partners LP (NYSE:CEQP).
An Insider Favorite
To most people, Crestwood Equity Partners does not sound like a familiar name. That’s because the partnership does not serve consumers directly. Instead, it operates in the midstream energy sector.
Headquartered in Houston, Texas, Crestwood Equity Partners is a master limited partnership (MLP) with three operating segments: Gathering & Processing, Storage & Transportation, and Marketing, Supply & Logistics. The partnership owns a portfolio of midstream assets located primarily in the Bakken Shale, Delaware Basin, Powder River Basin, Marcellus Shale, Barnett Shale, and Fayetteville Shale.
Through these assets, CEQP provides a wide range of services, such as the gathering, storage, and transportation of crude oil, natural gas, and natural gas liquids (NGLs).
If you have been following this column, you would know that MLPs can be great income opportunities. That is because these entities are required, by law, to distribute most of their available cash to investors. As a result, MLPs have become some of the highest-yielding names in the current stock market.
In the case of Crestwood Equity Partners LP, the quarterly distribution rate stands at $0.60 per common unit at the moment. Trading at around $32.00 apiece, CEQP stock offers an annual dividend yield of 7.5%.
Now, before you start saying that a high dividend yield could simply be a sign of trouble, here’s a fact: As of March 31, 2018, Crestwood Equity Partners’ management and insiders collectively owned more than 30% of all common limited partnership units. (Source: “Investor Presentation,” Crestwood Equity Partners LP, last accessed June 27, 2018.)
In this day and age, talk is cheap. But when management is willing to put their own money on the line, it’s a more genuine vote of confidence.
Is the Payout Safe?
Of course, like we do with all high-yield stocks, we should still check CEQP’s distribution safety. And since it is an MLP, the key performance metric to focus on would be distributable cash flow. At Crestwood, the amount is calculated by taking adjusted earnings before interest, tax, depreciation, and amortization (EBITDA), then adjusting for cash interest expense, maintenance capital expenditures, income taxes, and the partnership’s share of its unconsolidated affiliates’ distributable cash flow.
In the first quarter of 2018, Crestwood Equity Partners generated $53.4 million in distributable cash flow. The amount resulted in a distribution coverage ratio of approximately 1.25-times. (Source: “Crestwood Announces First Quarter 2018 Financial and Operating Results,” Crestwood Equity Partners LP, May 1, 2018.)
To put it simply, the partnership earned 25% more cash than what was needed to meet its distribution obligation. That is a sizable margin of safety.
Going forward, management expects Crestwood Equity Partners’ distributable cash flow to come in between $195.0 million to $225.0 million in full-year 2018. This should allow the partnership to achieve a distribution coverage ratio of greater than 1.2-times for the entire year.
Crestwood Equity Partners LP: A Stable Business
Here’s the best part: Despite operating in the volatile energy industry, Crestwood Equity Partners has built a stable business. The partnership does not drill new wells. Instead, it provides midstream services to a high-quality customer base, often through long-term contracts.
Its current customers include well-known names such as Royal Dutch Shell plc (NYSE:RDS.A), Total SA (NYSE:TOT), Williams Companies Inc (NYSE:WMB), and Exxon Mobil Corporation (NYSE:XOM).
For 2018, management expects 86% of CEQP’s forecasted EBITDA to come from take-or-pay and fixed-fee contracts. Therefore, even if earnings from its variable rate segment take a hit, the bulk of the partnership’s business would still be secure.
As is stands, Crestwood Equity Partners LP’s 7.5% yield could be an opportunity.