Delek Logistics Partners LP: Can Investors Count on This 11% Yield?
A High-Yield Stock You Likely Haven’t Considered
If this is the first time you have come across Delek Logistics Partners LP (NYSE:DKL), you might feel a little skeptical about it.
If you look up DKL stock on Google Finance or Yahoo! Finance, you’ll see that it’s offering a jaw-dropping yield of about 11%. In this day and age, a dividend yield north of 10% often turns out to be a sign of trouble.
The thing is, though, Delek Logistics Partners is not the average troubled double-digit yielder. Despite offering cash distributions that amount to a yield more generous than the vast majority of stocks trading in today’s market, DKL actually has the ability to back its payout.
Let me explain.
Delek Logistics Partners LP
Headquartered in Brentwood, Tennessee, Delek Logistics Partners is a master limited partnership (MLP) created by Delek U.S. Holdings Inc (NYSE:DK) in 2012. Today, the partnership owns, operates, acquires, and constructs crude oil and refined products logistics and marketing assets.
Delek Logistics Partners has two main operating segments: “Pipelines/Transportation” and “Wholesale/Terminalling.” Through these two segments, the MLP gathers, transports, and stores crude oil and markets, distributes, transports, and stores refined products in select regions of the southeastern U.S. and west Texas. (Source: “Investor Presentation: MLP & Energy Infrastructure Conference – May 2019,” Delek Logistics Partners LP, last accessed November 7, 2019.)
Note that, while Delek Logistics Partners was created by Delek U.S. Holdings and does a substantial amount of business with it, the partnership also serves third-party customers.
Now, let’s go back to what makes Delek Logistics stock stand out: its distributions.
When Delek Logistics Partners was formed, it had a minimum quarterly distribution rate of $0.375 per unit. Its first cash distribution of $0.224 per unit—paid in February 2013—was a prorated payment corresponding to that minimum distribution rate.
Since then, management has raised DKL stock’s payout every single quarter. (Source: “Delek Logistics Partners, L.P. Common Units Representing Limited Partner Interests (DKL) Dividend History,” Nasdaq, last accessed November 7, 2019.)
The latest distribution hike arrived in October, when the MLP declared a quarterly cash distribution of $0.88 per common limited partner unit. The amount represented an 11.4% increase year-over-year and a 3.5% increase sequentially. This marked Delek Logistics stock’s 27th consecutive quarterly distribution hike. (Source: “Delek Logistics Partners, LP Increases Quarterly Cash Distribution to $0.88 per Common Limited Partner Unit,” Delek Logistics Partners LP, October 25, 2019.)
In a time when most dividend-paying companies would be proud to deliver annual payout increases, the quarterly distribution hikes at Delek Logistics Partners make it quite special.
DKL Stock Maintains a Safe Payout
To see whether an MLP’s distribution is safe, we usually look at its distributable cash flow. Ideally, we want to see an MLP that generates distributable cash flow that’s in excess of its payout, i.e. a distribution coverage ratio of greater than one.
Delek Logistics Partners recently reported its third-quarter earnings. The report showed that, during the quarter, the partnership generated $33.7 million of distributable cash flow, a $1.3-million improvement from the $32.4 million earned in the year-ago period. (Source: “Delek Logistics Partners, LP Reports Third Quarter 2019 Results,” Delek Logistics Partners LP, November 4, 2019.)
And considering that DKL was paying $30.4 million in cash distributions for the quarter, its distribution coverage ratio arrived at 1.11 times. Therefore, the MLP generated more than enough cash to cover its payout.
Looking at the results that are available so far this year, things seem just as solid. Delek Logistics Partners generated $93.8 million of distributable cash flow in the first nine months of 2019. Its actual cash distributions, on the other hand, totaled $86.7 million for this period.
As a result, its distribution coverage ratio was 1.08 times. So again, the MLP managed to outearn its payout.
Given the rock-solid business at Delek Logistics Partners LP and the strong distribution coverage, I wouldn’t be surprised to see the partnership continue its streak of distribution hikes.
In the company’s latest conference call, Uzi Yemin, Chairman, President, and Chief Executive Officer of DKL’s general partner, said,
As DK continues to focus on realizing company-owned versus third party assets to meet their logistics needs, it should increase the opportunity to partner with our sponsor to provide future growth at DKL. With continued growth at DKL, this should support our annual distribution growth for limited partner units of at least 10% through 2019 while maintaining appropriate annual distribution coverage.
(Source: “Delek Logistics Partners (DKL) CEO, Uzi Yemin on Q3 2019 Results – Earnings Call Transcript,” Seeking Alpha, November 5, 2019.)
Bottom Line on Delek Logistics Partners LP
In today’s market, a safe yield of 11% is already a rare find.
Add in Delek Logistics Partners LP’s distribution growth potential and it’s easy to see why DKL stock could be an opportunity.