EnLink Midstream LLC: Overlooked Energy Stock Now Yields 16%
A High-Yield Stock You Might Not Have Considered
By now, you’ve probably realized that there is a pattern when it comes to double-digit yielders in today’s market: a lot of them experienced huge tumbles in their share prices, and a lot of them have also slashed their dividends recently.
This should not come as a surprise. There is an inverse relationship between a company’s dividend yield and stock price.
To earn that ultra-high yield, investors have to be prepared to bear more risk. Given the current low-yield environment, stocks with double-digit dividend yields generally aren’t the safest bets.
However, it’s also important to note that if a beaten-down, high-yield stock can afford the current payout—even though the payout is lower than before—it just might be an opportunity for yield hunters.
Take a look at EnLink Midstream LLC (NYSE:ENLC), for instance. The Dallas, TX-based energy company operates a large, integrated midstream platform that consists of approximately 12,000 miles of pipelines, 21 processing facilities, and seven fractionators.
Like a lot of energy stocks, ENLC has not been a hot commodity this year. Due to the challenging operating environment, the partnership also reduced its cash distribution. (Source: “ENLC Distributions,” Enlink Midstream LLC, last accessed September 30, 2020.)
Still, it remains an ultra-high yielder. With a quarterly distribution rate of $0.09375 per unit and a unit price of $2.35, ENLC stock offers an annual yield of 16%.
However you look at it, this is a staggeringly high yield.
In fact, it’s so high that my first impression when coming across this stock was that the yield was too good to be true.
However, after taking a look at the financials, I did find something quite special about this high-yield stock.
You see, like a lot of midstream operators, EnLink reports something called distributable cash flow. Ideally, we want to see the company generating higher distributable cash flow than its actual cash payout.
According to its latest earnings report, EnLink Midstream LLC generated $169.1 million in distributable cash flow in the second quarter of 2020. Its actual cash distributions, on the other hand, totaled $46.4 million for the period. (Source: “EnLink Midstream Reports Second Quarter 2020 Results and Updates 2020 Guidance,” EnLink Midstream LLC, August 4, 2020.)
Simple math shows that the company achieved a distribution coverage ratio of 3.65 times. No matter how bad the reputation of double-digit yielders might be, being able to cover its payout more than three times over is a commendable feat for EnLink Midstream.
The company also reports something called excess free cash flow, which it defines as distributable cash flow minus distributions declared on common units and growth capital expenditures. In the second quarter, EnLink’s excess free cash flow came in at $72.0 million.
In other words, the company not only funded its oversized payout and capital expenditures, but also had quite a bit of money left over. To put that in perspective, EnLink’s second-quarter free cash flow marked a 64% increase from the first quarter.
And the best could be yet to come.
In the company’s earnings conference call, its chief financial officer, Pablo G. Mercado, said, “…we expect our excess free cash flow to be higher in the back half of 2020 as our capital expenditures continue to decrease.” (Source: “Q2 2020 EnLink Midstream LLC Earnings Call,” EnLink Midstream LLC, August 5, 2020.)
Bottom Line on EnLink Midstream LLC
As a risk-averse income investor, I wouldn’t call EnLink Midstream a slam dunk. But with improving financials and a well-covered 16% yield, ENLC stock deserves a spot on income investors’ watch lists.