A High-Yield Stock to Think About
If you think a 10% yield is too good to be true in today’s stock market, then what Delek Logistics Partners LP (NYSE:DKL) is offering right now just might make your jaw drop.
Headquartered in Brentwood, Tennessee, Delek Logistics Partners is a master limited partnership (MLP) created by Delek US Holdings Inc (NYSE:DK) in 2012. The MLP owns, operates, acquires, and builds crude oil and refined products logistics and marketing assets.
If you’ve been following this column, you’d know that MLPs can be great income investments because they are essentially tax pass-throughs. As long as an MLP distributes most of its available cash to unitholders, it pays little to no income tax at the corporate level. As a result, MLPs have become some of the highest-yielding names in today’s market.
But the yield from Delek Logistics Partners LP looks astounding, even by MLP standards. In February, the partnership paid a quarterly cash distribution of $0.885 per common limited partner unit. With DKL stock trading at $20.55 per unit at the time of this writing, it has an annual yield of 17.7%.
And that’s not all, February’s cash distribution actually represented a 9.3% increase year-over-year and a 0.6% increase sequentially. In fact, if you look back, you’ll see that this MLP has has increased its payout every quarter since its initial public offering (IPO) in 2012. (Source: “Delek Logistics Partners, L.P. Common Units Representing Limited Partner Interests (DKL) Dividend History,” Nasdaq, last accessed March 6, 2020.)
Note that, when Delek Logistics Partners LP was formed, its partnership agreement set a minimum quarterly distribution rate of $0.375 per unit. With DKL stock currently paying $0.885 per unit, the MLP’s per-unit payout has grown by a whopping 136% since its creation.
And keep in mind that Delek Logistics Partners achieved all this despite a major downturn in the energy industry. When oil and gas prices crashed big-time in the summer of 2014, many energy companies slashed their dividends. And yet, DKL was still mailing out bigger distribution checks to its investors every single quarter.
Is the Distribution Safe at Delek Logistics Partners LP?
Of course, as I mentioned earlier, even a 10% yield can be considered too good to be true in this day and age. Delek Logistics Partners is offering a yield well above the double-digit mark. So can the payout possibly be safe?
Well, to find out the answer, let’s take a look at the MLP’s key performance metric: distributable cash flow. To see whether the MLP’s payout is safe in a given reporting period, all you need to do is take its distributable cash flow and compare the number to its actual payout for that period.
According to the company’s latest earnings report, Delek Logistics Partners generated $33.0 million of distributable cash flow in the fourth quarter of 2019, which represented a solid 19.7% increase year-over-year. (Source: “Delek Logistics Partners, LP Reports Fourth Quarter 2019 Results,” Delek Logistics Partners LP, February 25, 2020.)
Since the partnership paid total cash distributions of $30.6 million for the quarter, it achieved a distribution coverage ratio of 1.08 times, leaving a margin of safety.
It’s a similar story in full-year 2019. During the year, Delek Logistics Partners generated $127.0 million of distributable cash flow, up 4.5% from full-year 2018. Considering that the MLP paid $117.4 million of cash distributions for the year, its payout ratio came out to 1.08 times. So again, DKL managed to outearn its payout.
One of the reasons why Delek Logistics Partners LP can achieve this kind of safe distribution growth in the volatile energy industry is the nature of its business. DKL does not drill new wells. Instead, most of its business is done through multi-year contracts with firm commitments.
According to its latest investor presentation, the partnership earns approximately 68% of its gross margin from minimum volume commitments. This allows the MLP to run a relatively predictable business despite commodity price swings. (Source: “Investor Presentation February 2020,” Delek Logistics Partners LP, last accessed March 6, 2020.)
The best part is, Delek Logistics Partners is not done with its payout increases.
During the company’s latest earnings conference call, Uzi Yemin, chairman, president, and chief executive officer of DKL’s general partner, said, “With an outlook for continued growth, we expect a five percent increase in our LP distribution in 2020, while maintaining appropriate distribution coverage and flexibility.” (Source: “Q4 2019 Delek Logistics Partners LP Earnings Conference Call,” Delek Logistics Partners LP, February 26, 2020.)
In other words, if an investor purchases DKL stock today, there’s a good chance they’ll earn a yield on cost that’s higher than 17.7% this year.