Global Partners LP: The Best 10% Yielder on the Market?
Want to Earn a Double-Digit Yield? Read This
If you use a stock screener to show companies with dividend yields of 10% or higher, you’ll likely find that these companies don’t look like the safest bets.
And it’s not exactly a surprise. Given the low-interest-rate environment we are in, if a company offers a safe payout of 10%, investors would jump on the opportunity. Before long, they would bid up that company’s share price and cause its yield to drop.
This also means a super-high yield could be interpreted as a sign of trouble.
So when you first come across Global Partners LP (NYSE:GLP), it’s understandable that you might be very skeptical about it.
GLP stock pays investors a quarterly cash distribution of $0.515 per unit. That’s $2.06 per unit annualized.
Global Partners LP stock currently trades at $20.10 per unit. A simple calculation shows that the partnership has an annual distribution yield of 10.2%.
But if you think that GLP is just another double-digit yielder that can’t cover its payout, what I’m about to show you will come as a nice surprise.
This High-Yield Stock Is Special
Global Partners LP is a master limited partnership (MLP) with three operating segments: “Wholesale,” “Gasoline Distribution & Station Operations,” and “Commercial.”
Headquartered in Waltham, Massachusetts, the partnership is one of the largest independent owners, suppliers, and operators of gasoline stations and convenience stores in the Northeast U.S., with about 1,600 locations.
Moreover, GLP has access to one of the largest terminal networks in New England and New York. The network allows the partnership to distribute gasoline, distillates, residual oil, and renewable fuels to wholesalers, retailers, and commercial customers.
In addition, the company transports petroleum products and renewable fuels by rail from the mid-continental U.S. and Canada.
Like most MLPs, Global Partners reports something called distributable cash flow. It’s defined as net income plus depreciation and amortization, minus maintenance capital expenditures, then adjusting for extraordinary and non-recurring items.
This is a metric that deserves the special attention of income investors. The reason is simple: income investors want dividend safety, and in the case of MLPs, one key indication of distribution safety is for a partnership to outearn its cash distribution with distributable cash flow.
The good news is, that’s exactly what Global Partners LP has done.
In 2018, Global Partners generated $173.7 million in distributable cash flow, which represented a whopping 60.4% increase year-over-year. After subtracting distributions to preferred unitholders, GLP still had $171.0 million in distributable cash flow. (Source: “Global Partners Reports Fourth-Quarter and Full-Year 2018 Financial Results,” Global Partners LP, March 7, 2019.)
Now, considering that the partnership paid total distributions of $63.7 million to limited partners and general partners in 2018, its distributable cash flow provided 2.7 times coverage for the payout.
In other words, last year, Global Partners outearned its cash distributions more than twice over.
Such a strong distribution coverage means, if management wants to raise GPL stock’s payout, they would have plenty of room to do so.
And they did.
At the end of 2018, Global Partners LP stock had a quarterly distribution rate of $0.475 per unit. Since then, management has raised the payout on three different occasions, by a total of 8.4%. (Source: “Distribution History,” Global Partners LP, last accessed October 24, 2019.)
And thanks to a growing business, Global Partners has no problem covering its rising distributions.
According to its most recent earnings report, the partnership’s distributable cash flow grew another 33.8% year-over-year to $28.1 million in the second quarter of 2019. After subtracting $1.7 million in preferred-unit distributions, there was $26.4 million left. (Source: “Global Partners Reports Second Quarter 2019 Financial Results,” Global Partners LP, August 8, 2019.)
During the quarter, Global Partners paid $17.3 million in cash distributions to limited partners and a general partner. As a result, it had a distribution coverage ratio of 1.5 times.
Compared to other companies with yields of 10% or higher, what Global Partners has achieved is a very, very wide margin of safety.
Bottom Line on Global Partners LP
In this day and age, a well-covered, double-digit yield is a rare find in the market. Global Partners LP happens to be one of the very few stocks offering that.
If the partnership can continue raising its payout like it has done in the past few quarters, GLP stock would become even more attractive to yield-seeking investors.