Collect Safe and Increasing Payouts From This Energy Stock
Of all the things a company can do, these two are my favorites: Increasing dividends and increasing dividend safety. And Delek Logistics Partners LP (NYSE:DKL) manages to accomplish both.
To most people, Delek Logistics Partners won’t be a familiar name, but DKL stock stands out when it comes to returning cash to investors. When the partnership was created in 2012, it had a minimum quarterly distribution rate of $0.375 per unit. Today, DKL pays investors $0.77 per unit. That translates to an increase of 105%! (Source: “Dividend History for Delek Logistics Partners (dkl),” StreetInsider, last accessed August 8, 2018.)
What makes this achievement even more impressive is that the partnership comes from the energy sector. Over the last several years, oil and gas prices have had quite a tumble, and many energy companies are still struggling today. Some of them have even cut back their dividends.
But at Delek Logistics Partners, the payout to unitholders has only been rising. As a matter of fact, since the partnership’s initial public offering (IPO), management has raised the cash distribution every single quarter.
Last month, the partnership declared its latest quarterly cash distribution. The amount represented a 2.7% increase sequentially and a 9.2% increase year-over-year. This also marked DKL stock’s 17th consecutive quarterly distribution hike! (Source: “Delek Logistics Partners, LP Increases Quarterly Cash Distribution to $0.77 per Common Limited Partner Unit,” Delek Logistics Partners LP, July 24, 2018.)
However, the main reason why this partnership deserves an upgrade is not its recent distribution increase. Instead, it was due to the wider margin of safety in its payout.
Delek Logistics Partners LP: Making Distributions Safer
You see, Delek Logistics Partners LP reported earnings last week. In the second quarter of 2018, the partnership generated $33.5 million in distributable cash flow, marking a 45.5% increase year-over-year. Since DKL paid total distributions of almost $25.0 million for the quarter, it had a distributable cash flow coverage ratio of 1.3 times. (Source: “Delek Logistics Partners, LP Reports Second Quarter 2018 Results,” Delek Logistics Partners LP, August 7, 2018.)
This was a substantial improvement from its coverage ratio of less than 1.1 times in the year-ago period.
The increasing dividend safety would be more apparent if you look at the half-year results. That’s because, in the first six months of 2017, the partnership generated $41.5 million of distributable cash flow while paying $42.8 million in actual distributions. In other words, it did not generate quite enough cash to cover its payout.
This year, though, things have been much, much better. Thanks to solid financial performance, Delek Logistics Partners’ distributable cash flow coverage ratio widened to almost 1.3 times in the first six months of 2018.
To risk-averse income investors, these numbers should be reassuring.
Lock in a Safe Double-Digit Cash Return
Usually, when a company delivers consistent dividend increases while maintaining their dividend safety, its stock would be highly sought after. And as investors bid up the company’s share price, its yield would drop.
Delek Logistics Partners also enjoyed a rally after its latest earnings report, but the stock still carries a substantial payout. Trading at around $30.00 per unit at the time of this writing, DKL stock offers an annual distribution yield of 10.3%.
For yield-seeking investors, this energy partnership deserves a serious look.