SUN Stock: Sunoco LP’s 12.5% Return Hard to Ignore
Diversified Business Protects Sunoco’s High Dividend Yield
For investors seeking a high dividend yield, Sunoco LP (NYSE:SUN) stock presents a good opportunity due to its scale and coverage in the fuel distribution and retail business in the U.S.
Sunoco is a master limited partnership (MLP), which means investors buy units of this company to earn dividends. In recent years, many U.S. energy firms have reorganized their slow-growing, yet stable businesses, such as pipelines and storage terminals, into MLPs.
There are some important differences between buying shares of a corporation and buying a stake in an MLP. With MLPs, investors buy units of the partnership, rather than shares of stock, and are referred to as “unitholders.” Further, companies that use the MLP format tend to operate in very stable, slow-growing industries, such as pipelines. MLPs usually don’t offer too much upside in the unit price, but the stability of the industries that use the MLP model translates into a below-average risk for investors and high dividend yields.
Sunoco’s MLP, with the market-beating 12.5% dividend yield, belongs to the above group, where you’re unlikely to see a big capital gains, but you can benefit from the company’s stable dividend distribution. In its latest increase in its dividend distribution, Sunoco declared an $0.8255 dividend per common unit and $3.3020 per common unit on an annualized basis, representing a 19.1% increase compared to the same period a year ago. The hike marked the 13th consecutive quarter that the company has raised its distribution. (Source: “Sunoco LP Announces 1.0% Increase in Quarterly Distribution,” Sunoco LP, July 26, 2016.)
Another reason I like SUN stock is that it’s a good diversification away from pure commodity plays, which are often affected by the ups and downs in the commodity cycles. Sunoco margins have relatively remained stable in the recent oil downturn.
Sunoco has diversified its business into four segments: Fuel Retail, Convenience Stores and Merchandise, Food Chains, and Land Banks. It operates 1,340 retail fuel sites and convenience stores, including “APlus,” “Stripes,” and “Laredo Taco.” The company also distributes motor fuel to convenience stores, independent dealers, commercial customers, and distributors located at 6,900 sites in more than 30 states. The profit margin from its Laredo Taco brand is close to 40%, just to give an idea of its “cash cow” status.
Due to this diversification, the company has been able to cope with the downturn in any of its business segments. For example, wholesale and retail fuel distribution accounted for about 56% of Sunoco’s total $1.94 billion in gross profit last year, but the rest came from its convenience store business and rental income. (Source: “Investor Presentation,” Sunoco LP, September 2016.)
Final Thoughts on Sunoco Stock
The other important hedge which SUN stock provides to its investors is that it makes money on the volume of fuel products sold, no matter where the price of oil goes. That’s precisely the reason that Sunoco business can’t go wrong, no matter where the oil prices trade.
In the second quarter, Sunoco’s gross profit rose to $580.6 million from $545.2 million in the second quarter of the previous year, helped by an increase in the merchandise margin and the contribution from third-party acquisitions. (Source: “Sunoco LP Announces Second Quarter 2016 Financial and Operating Results,” Sunoco LP, August 3, 2016.)
SUN stock’s very attractive dividend yield and its stable business model may be a good opportunity for income investors seeking a long-term exposure to a stable business. For investors who don’t want to try the “junk” companies in this race for high dividend yields, Sunoco stock could provide a compelling total return.
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