CrossAmerica Partners LP: This 11.8% Yielder Is Finally Worth a Look
1 High-Yield Stock to Think About
CrossAmerica Partners LP (NYSE:CAPL) has been an ultra-high yielder for quite some time. But the partnership wasn’t really a top pick for income investors. The reason was simple: while management wanted to return a substantial amount of cash to investors, the business did not always generate enough cash to cover the payout.
For instance, in the first quarter of 2018, CrossAmerica Partners generated $16.7 million in distributable cash flow. But because the partnership paid out $21.4 million in actual cash distributions, its distribution coverage ratio turned out to be 0.8 times. (Source: “CrossAmerica Partners LP: Reports First Quarter 2018 Results,” CrossAmerica Partners LP, May 7, 2018.)
As risk-averse income investors, we like to see companies with dividend coverage ratios of greater than one due to the margin of safety. If a company cannot make enough money to meet its dividend obligations, it will likely have to cut its payout at some point down the road.
And that’s exactly what happened to CrossAmerica Partners LP. On the same day of its first-quarter earnings release, the partnership announced that its board of directors declared a quarterly distribution of almost $0.53 per unit. The amount was a 15.3% cut from its previous quarterly distribution rate of almost $0.63 per unit. (Source: “CrossAmerica Partners LP: Announces Reduction in Quarterly Distribution,” CrossAmerica Partners LP, May 7, 2018.)
But investors were still worried. What if the partnership still cannot cover the payout? And if that’s the case, will there be another distribution cut?
Fortunately, that was not the case. Last week, CrossAmerica Partners LP reported its second-quarter results. And things looked much, much better.
CAPL Stock: Improving Dividend Safety
In the second quarter of 2018, CrossAmerica Partners generated almost $20.0 million in distributable cash flow. Given its total distributions of $18.0 million paid during the quarter, the partnership achieved a distribution coverage ratio of 1.1 times. The ratio not only represented a huge improvement from the first quarter’s 0.7-times coverage, but was also better than the 1.0-times coverage reported for the year-ago period. (Source: “CrossAmerica Partners LP: Reports Second Quarter 2018 Results,” CrossAmerica Partners LP, August 6, 2018.)
At the same time, the partnership has maintained its quarterly distribution rate of almost $0.53 per unit during the quarter. Trading at $17.75 per unit, CrossAmerica Partners LP offers investors an annual yield of 11.8%.
CrossAmerica Partners LP: A Growing Business
But of course, cutting one’s distribution to make the payout safer is not really something to brag about. What really makes CAPL stock stand out is that the partnership has also started growing its business.
CrossAmerica Partners is in the wholesale motor fuel distribution business. It buys unbranded fuel and distributes it at branded prices. Right now, CrossAmerica is one of the largest distributors of Exxon Mobil Corporation’s (NYSE:XOM) products by fuel volume in the United States. (Source: “Wholesale Gas,” CrossAmerica Partners LP, last accessed August 7, 2018.)
At the same time, the partnership has established relationships with other major oil brands, such as Royal Dutch Shell PLC (NYSE:RDS.A), Sunoco LP (NYSE:SUN), BP plc (NYSE:BP), and Phillips 66 (NYSE:PSX).
Other than distributing motor fuel to gas stations across the U.S., CAPL has its own retail segment. The partnership currently owns or leases approximately 900 retail fuel sites.
In the second quarter of 2018, both wholesale and retail segments delivered solid growth for CrossAmerica Partners. In the wholesale business, the partnership distributed 272.4 million gallons of fuel, up two percent year-over-year. And since wholesale fuel margin expanded 18% to almost $0.07 per gallon in the quarter, CAPL’s wholesale fuel gross profit increased 20% year-over-year to $17.9 million.
In the retail segment, CrossAmerica’s gross profit increased by five percent in the second quarter. This was driven by a 22% improvement in motor fuel gross profit.
Meanwhile, the partnership has also streamlined its operations. CAPL’s general and administrative expenses totaled less than $4.5 million in the second quarter of 2018, marking a 14% decrease from a year ago.
The Bottom Line on CrossAmerica Partners LP
Ultimately, I wouldn’t call CAPL stock a sure thing. The partnership’s second-quarter results showed substantial improvements, but it is yet to establish a track record.
Still, with a well-covered 11.8% yield, CrossAmerica Partners LP deserves a spot on every income investor’s watch list.