Sunoco LP: 10.8% Yield from This High Dividend Stock
This High-Dividend Stock Now Yields 10.8%
With the stock market soaring past its all-time high, not many people cared about high-dividend stocks. Still, for income investors, using high-yield stocks to boost portfolio returns can have its benefits.
For instance, if you invest $200,000 in a portfolio that’s currently yielding five percent, you can collect a return of $10,000 in a year. If the portfolio can yield 10%, though, you would only need $100,000 of initial investment to have the same dollar return. That’s an extra $100,000 that you can spend, invest, or do whatever you want with.
The thing is, most companies don’t offer a yield of 10%, or even five percent. In fact, the average dividend yield of S&P 500 companies right now is less than two percent. This means if you want to collect $10,000 a year from dividends of an S&P 500 portfolio, you would need to set aside a whopping $500,000.
Fortunately, there are still companies paying solid dividends. Sunoco LP (NYSE:SUN), for instance, is a high-dividend stock that’s currently yielding 10.8%.
Sunoco LP is a master limited partnership (MLP) that operates through two main segments, wholesale fuel distribution and retail convenience stores.
In its wholesale business, the partnership distributes Sunoco-branded motor fuel to approximately 7,825 convenience stores, independent dealers, distributors, and commercial customers. In 2016, the partnership distributed 5.3 billion gallons of third party wholesale fuel.
In the retail segment, Sunoco operates approximately 1,355 convenience stores. These stores sold 2.5-billion gallons of retail fuel and generated $2.3 billion in merchandise sales in 2016.
In an industry where the product is highly commoditized, Sunoco managed to build a strong brand name. The partnership’s Sunoco fuel brand has been around for 125 years. It is currently the only non-refiner wholesaler that has its own fuel brand.
Furthermore, Sunoco boosted its brand by having a strong presence in motor racing. The company is the largest manufacturer and marketer of racing fuels in the world and is currently the official fuel sponsor of NASCAR. Sunoco also provides the official racing fuel to over 500 racetracks in the U.S.
Strong Brand Presence
Of course, in this day and age, having a brand name does not guarantee success in the energy industry, especially with the downturn in oil prices. However, note that Sunoco’s wholesale motor fuel distribution business is secured by long-term, fee-based distribution contracts. This provides stability to the partnership’s cash flow.
But what about retail?
Well, as it turns out, Sunoco is divesting its retail business. In April, the company announced that it would sell most of its convenience stores to 7-Eleven, Inc. in a deal worth $3.3 billion. (Source: “Sunoco LP Announces Strategic Divestiture of Convenience Stores in Continental United States,” Sunoco LP, April 6, 2017.)
Under this agreement, Sunoco would sell approximately 1,110 convenience stores located in 19 geographic regions. Moreover, after 7-Eleven acquires these stores, they would continue to sell Sunoco brand fuels. The companies have entered into a 15-year take-or-pay fuel supply agreement. The transaction is expected to close by the fourth quarter of 2017.
This is great news for Sunoco. The company not only got rid of most of its retail business, but maintained its fuel distribution to these convenience stores through a long-term, fixed-rate take-or-pay supply contract. At the same time, Sunoco can use the proceeds from this transaction to repay its debt and improve its financial profile. According to the partnership, Sunoco would reduce its long-term leverage target to a range of 4.50 to 4.75 times.
Improving Financial Profile
(Source: “Divestiture of Retail Operations in Continental U.S.,” Sunoco LP, last accessed May 16, 2017.)
The divestiture is also good news for investors counting on Sunoco’s distributions. While transaction expenses would certainly have an impact at first, reducing leverage would eventually allow Sunoco to target a long-term distribution coverage ratio of 1.1 times.
In addition, retail has been the more capital-intensive part of Sunoco’s business. With the retail business massively reduced, the partnership would be able to reduce its capital needs by nearly 50% from its initial 2017 guidance of $290.0 million.
The Bottom Line on This High Dividend Stock
Shares of Sunoco LP stock are up more than 25% since the divestiture announcement. A company’s dividend yield moves inversely to its price. But, even with a higher price, Sunoco is still yielding an impressive 10.8%. Investors looking to boost the yield of their income portfolios should seriously consider this high-dividend stock.