Genesis Energy, L.P.: This 10.4% Yielder is Returning to Distribution Growth
This Double-Digit Yielder Deserves a Look
As I’ve said plenty of times in this column, income investors should always approach double-digit yielders with caution. The reason is simple: when most companies can’t come up with a five-percent payout, a dividend yield of over 10% could be a sign of trouble.
Still, if you have your eyes set on earning an ultra-high yield, then I suggest you take a look at Genesis Energy, L.P. (NYSE:GEL).
Genesis Energy does not have a business that’s as solid as The Coca-Cola Co (NYSE:KO) or Procter & Gamble Co (NYSE:PG), and its distribution history was less than stellar. But GEL stock does offer a jaw-dropping current yield, and its management is determined to grow that payout in the years ahead.
Genesis Energy, L.P. is a master limited partnership (MLP) headquartered in Houston, Texas. It runs a diversified midstream business, providing offshore pipeline transportation, sodium minerals and sulfur services, marine transportation, and onshore facilities and transportation services.
The partnership has operations in Texas, Louisiana, Arkansas, Mississippi, Alabama, Florida, Wyoming, and the Gulf of Mexico.
GEL stock is an ultra-high yielder. The board of directors of its general partner recently declared a cash distribution of $0.55 for each common unit of Genesis Energy. Since GEL stock trades at around $21.20 apiece, that cash payout translates to an annual yield of 10.4%.
Genesis Energy, L.P.: Is the Distribution Safe?
Of course, like I said, GEL is not the perfect dividend stock. In particular, the partnership has cut its payout before.
In October 2017, Genesis Energy reduced its quarterly distribution rate from $0.7225 per unit to $0.50 per unit, marking a cut of 30.8%. (Source: “Genesis Energy, L.P. Confirms Previous Financial Guidance and Plans to Further Enhance Its Balance Sheet and Financial Flexibility by Reallocating Capital,” Genesis Energy, L.P., October 12, 2017.)
The thing is, though, the partnership quickly got back on its feet and began raising its payout in just one quarter after the distribution cut.
As a matter of fact, since the beginning of 2018, GEL stock has increased its cash payout to investors every single quarter.
Now, given the partnership’s not-so-perfect distribution history, you might be wondering whether the recent payout increases were a bit too aggressive.
To answer that question, let’s take a look at the financials.
Genesis Energy reports something called available cash before reserves, which is equivalent to the distributable cash flow measure reported by most MLPs. The partnership calculates this metric by taking adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), then adjusting for items like maintenance capital utilized, net cash interest expense, and cash tax expense.
In the third quarter of 2018, Genesis Energy generated $112.7 million in available cash before reserves. The amount included a one-time gain on sale of assets of $3.4 million. Excluding that one-time gain, GEL’s available cash before reserves came in at $109.3 million. Considering that the partnership paid total distributions of $66.2 million for the quarter, it achieved a distribution coverage ratio of 1.65 times. (Source: “Genesis Energy, L.P. Reports Third Quarter 2018 Results,” Genesis Energy, L.P., November 1, 2018.)
In other words, the cash generated from the partnership’s operating activities was 65% more than what was needed to meet its distribution obligation for the quarter. In the MLP business, that’s a very wide margin of safety.
Looking further back, we see that in the 12-month period ended September 30, 2018, Genesis Energy had a solid distribution coverage ratio of 1.64 times.
Most recently, the partnership received approximately $300.0 million in total net cash proceeds from the divestiture of some of its non-core assets. The money was used to pay down debt, thus improving GEL’s balance sheet profile.
The Best Could Be Yet to Come for GEL Stock
At the end of the day, a 30.8% distribution cut is not easy to forget. And since oil prices are still deep in the doldrums, why should investors consider this ultra-high yielder?
Well, other than its strong distribution coverage, Genesis Energy also deserves investors’ attention due to its substantial fixed margin business.
For instance, in its offshore pipeline transportation segment, the partnership earns a tariff-based fee income and has no direct exposure to commodity prices. The same goes for GEL’s onshore pipeline business. In the marine transportation segment, Genesis Energy has no direct commodity price exposure and generates most of its revenue from term contracts. (Source: “UBS Midstream, MLP & Utilities One-on-One Conference,” Genesis Energy, L.P., last accessed January 16, 2019.)
The best part is, at its latest investor presentation, management confirmed that they plan to raise the partnership’s cash distribution by at least $0.01 per unit every quarter through 2022.
In other words, while Genesis Energy already offers a very impressive 10.4% yield, investors purchasing GEL stock today will likely receive an even higher yield on cost a few years down the road.
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