EQM Midstream Partners LP: Can You Count on This 13.9% Yield?
This Energy Stock Offers a Jaw-Dropping Payout
In this day and age, a lot of people like to go after the soaring tickers. But if you are an income investor, the beaten-down section of the stock market could be worth a look.
Case in point: EQM Midstream Partners LP (NYSE:EQM) is a master limited partnership (MLP) that owns, operates, acquires, and develops midstream energy assets in the Appalachian Basin. Over the past 12 months, its unit price went from $55.59 to $33.39, marking a drop of nearly 40%.
Needless to say, unitholders weren’t happy about EQM stock’s performance. But if you are an investor looking to earn an oversized passive income stream, keep in mind that there is an inverse relationship between a company’s dividend yield and stock price.
In the case of EQM Midstream Partners LP, the drop in its unit price has made it one of the highest yielders in the entire stock market.
With a quarterly cash distribution rate of $1.16 per unit, EQM Midstream Partners stock offers a jaw-dropping yield of 13.9%. To put that in perspective, the average S&P 500 company pays just 1.9% at the moment. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed August 9, 2019.)
That means, if an investor purchases EQM stock today, they would be earning a yield more than seven times that of the benchmark’s average.
Of course, given that this is a beaten-down energy stock with a huge yield, risk-averse income investors must be wondering whether the partnership can actually afford to have such a generous distribution policy.
Well, based on the company’s latest financial results, the answer seems to be “yes.”
Is the Distribution Safe at EQM Midstream Partners LP?
EQM has a large portfolio of natural gas transmission, storage, and gathering systems, including approximately 950 miles of Federal Energy Regulatory Commission (FERC)-regulated interstate pipelines and around 2,400 miles of high- and low-pressure gathering lines. Through these assets, the partnership provides midstream services to producers, utilities, and other customers.
EQM Midstream Partners reported second-quarter financial results on July 30. As is the case with most MLPs, the key performance metric to look for in this company’s financial report is distributable cash flow. In order for an MLP’s payout to be considered safe in a given reporting period, it needs to generate distributable cash flow that is in excess of its actual cash distributions.
In the second quarter of 2019, EQM Midstream Partners generated $238.7 million in distributable cash flow. Since the partnership declared total cash distributions of $232.5 million during the quarter, it achieved a distribution coverage ratio of 1.03 times. (Source: “ETRN and EQM Announce Second Quarter 2019 Results,” EQM Midstream Partners LP, July 30, 2019.)
In the first six months of 2019, the partnership earned $505.5 million in distributable cash flow. Its actual cash distributions, on the other hand, totaled $462.0 million for this period. Therefore, EQM Midstream Partners had a distribution coverage ratio of 1.09 times in the first half of the year.
Ideally, as a risk-averse income investor, I would like to see a higher distribution coverage ratio as it would leave a wider margin of safety.
However, keep in mind that when it comes to stocks paying 10% or more, being able to cover one’s payout is already considered an impressive feat.
Also, despite EQM Midstream Partners operating in the volatile energy industry, it has a solid business model in place. In particular, the business is backed by long-term contracts. As of June 30, the partnership had a weighted average transmission and storage contract life of 15 years and a weighted average gathering contract life of 11 years. Thanks to these long-term contracts, EQM can generate stable cash flows. (Source: “Investor Presentation July 2019,” EQM Midstream Partners LP, last accessed August 9, 2019.)
Furthermore, unlike many energy stocks that have cut their distributions in recent years, EQM has never cut its payout. As a matter of fact, since the partnership was founded in 2012, its cash payout to unitholders has only gone up. (Source: “Dividend History,” EQM Midstream Partners LP, last accessed August 9, 2019.)
Meanwhile, the partnership is not standing still. In its latest earnings release, EQM reiterated its long-term distribution coverage target of greater than 1.2 times.
Right now, EQM Midstream Partners stock already offers a staggering yield of 13.9%. If the partnership manages to execute the plan to improve its distribution coverage, EQM stock would look even more appealing.