Is This 14.9% Yield Safe?
Should Income Investors Consider This High-Yield Stock?
For income investors, few things are better than a double-digit dividend yield.
The problem is, though, ultra-high yield companies are not exactly known for their dividend safety. That’s why, instead of buying up these double-digit yielders, conservative income investors tend to shy away from them.
Still, there are exceptions. And American Midstream Partners LP (NYSE:AMID) could be one of them.
Headquartered in Houston, Texas, American Midstream Partners is a growth-oriented master limited partnership (MLP) formed in 2009. As the name suggests, the partnership focuses on providing midstream services that link energy producers to intermediate and end-use markets.
Today, AMID’s portfolio consists of about 5,100 miles of onshore and offshore natural gas, crude oil, and natural gas liquid (NGL), and saltwater pipelines; 17 gathering systems; eight natural gas processing plants; four fractionation facilities, and six terminal sites with around 6.7 million barrels of storage capacity. (Source: “Barclays MLP Corporate Access Days,” American Midstream Partners LP, February 27, 2018.)
Investors who follow commodity prices would know that the energy industry had a major downturn over the last several years. Due to the tumble in oil and gas prices, many energy companies were deep in the doldrums.
The neat thing is, while AMID operates in the oil and gas industry, its midstream focus makes it much more durable than its upstream counterparts. As a matter of fact, the partnership generates 93% of its cash flow from either fee-based or fixed-margin businesses. Therefore, only seven percent of AMID’s cash flow has exposure to commodity prices.
With a stable business model, American Midstream Partners has established a generous distribution policy.
Right now, the partnership pays quarterly distributions of $0.412 per common unit, which comes out to an annual yield of 14.9%.
As I mentioned earlier, ultra-high yielders are usually not the safest bets for income investors. But if you take a look at AMID’s financials, you’ll see that the partnership actually has enough resources to back its payout.
Like most MLPs, American Midstream Partners reports something called distributable cash flow. It is calculated by taking adjusted earnings before interest, tax, depreciation, and amortization (EBITDA), and then deducting cash interest expense, maintenance capital, and preferred distributions.
Last year, American Midstream Partners LP generated distributable cash flow of $91.1 million while its limited partner distributions totaled $86.2 million. That translated to a distribution coverage ratio of 1.06 times. (Source: “American Midstream Reports Fourth Quarter and Full Year 2017 Results,” American Midstream Partners LP, March 12, 2018.)
In the first quarter of this year, the partnership generated $21.9 million of distributable cash flow. Again, this was more than enough to cover its total limited partner distribution of $21.7 million for the quarter. (Source: “American Midstream Reports First Quarter 2018 Results,” American Midstream Partners LP, May 15, 2018.)
Don’t forget, American Midstream Partners operates in a business that has high barriers to entry. Pipelines are extremely costly to build. And even if you have the money, getting the regulatory approval from federal and local governments can be a painstaking task.
In other words, competition is limited. And that’s one of the reasons why American Midstream Partners can generate oversized cash flows quarter after quarter.
For investors who want to boost the yield of their income portfolio, AMID stock deserves a look.