Can a 14.3% Yield Possibly Be Safe?
For yield-seeking investors, few things are better than a 14.3% annual payout. But in an era when a four percent dividend can be considered high-yield, a double-digit yield just seems too good to be true. So, should investors consider it? Let’s take a look.
The stock in question is Martin Midstream Partners L.P. (NASDAQ:MMLP), a master limited partnership (MLP) headquartered in Kilgore, Texas.
Like most MLPs, Martin Midstream is in the midstream energy business. The partnership operates in four main segments: natural gas services; terminaling and storage; sulfur services; and marine transportation.
The first thing to note about this midstream partnership is its strong fee-based contract mix.
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For instance, in its natural gas services segment, MMLP’s natural gas storage contracts had a weighted average life of approximately three years, as of the end of 2017. With its terminaling and storage segment, companies use MMLP’s specialty and marine shore-based terminals by signing fee-based contracts with minimum volume commitments. According to the partnership’s latest investor presentation, approximately 61% of MMLP’s adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) in 2018 is expected to come from its fee-based operations. (Source: “2018 Financial Guidance & Operational Overview,” Martin Midstream Partners L.P., last accessed February 26, 2018.)
With a business model that’s largely fee-based, Martin Midstream Partners can limit its exposure to commodity price volatility. And that should allow the partnership to pay a steady dividend, right?
Well, in 2017, the partnership paid four quarterly distributions of $0.50 per unit. MMLP also generated distributable cash flow of $91.1 million for the year, which allowed it to achieve a distribution coverage ratio of 1.18 times, a quite commendable figure among ultra-high yielders. (Source: “Martin Midstream Partners Reports 2017 Fourth Quarter Financial Results,” Martin Midstream Partners L.P., February 14, 2018.)
However, the payout wasn’t exactly steady. One of the factors behind the solid distribution coverage in 2017 was that, in 2016, the partnership cut its quarterly distribution rate from $0.8125 per unit to $0.50 per unit. (Source: “Cash Distribution History,” Martin Midstream Partners L.P., last accessed February 26, 2018.)
Still, at the current distribution rate, MMLP stock offers a jaw-dropping annual yield of 14.3%.
Now, the big question is, will the partnership be able to sustain its current payout?
Well, in the latest investor update, management provided its 2018 guidance. For the current year, MMLP is expected to generate $156.1 million in total adjusted EBITDA, a slight decline from $156.2 million earned in 2017. The distribution coverage ratio, however, is expected to fall from 1.18 times in 2017 to 1.0 times in 2018. (Source: “2018 Financial Guidance & Operational Overview,” op. cit.)
That is not good news. If the partnership doesn’t leave any margin for safety, a worse-than-expected quarter could lead to a dividend cut. In the trading session following Martin Midstream Partners’ 2018 guidance, MMLP stock tumbled more than nine percent.
As I always say, past performance does not guarantee future results. Even though MMLP had solid distribution coverage in 2017, it still has a lot of work ahead in 2018 to maintain its 14.3% dividend yield.