Martin Midstream Partners L.P.: This 12.9% Yield Remains Safe
A High-Yield Stock You Likely Haven’t Considered
Even though dividend yields have gotten lower due to the prolonged stock market rally over the last several years, there are still companies offering substantial payouts. Using any of the stock screeners available on the Internet today, investors can easily find dozens of stocks with double-digit dividend yields.
However, if you take a look at the share price performance of these stocks, you’d see that most ultra-high yielders don’t have much of a following. In fact, sometimes a company can offer a high-dividend yield only because its stock price plunged big-time.
The reason why even the yield-seeking investors tend to stay away from ultra-high yielders is the concern about these companies’ dividend safety. For risk-averse income investors, few things can be worse than a dividend cut.
And that, my dear reader, is why Martin Midstream Partners L.P. (NASDAQ:MMLP) deserves your attention. The partnership not only offers a yield higher than the vast majority of stocks trading in today’s market, but it also makes more than enough money to cover its payout.
Let me explain…
As the name suggests, Martin Midstream Partners is in the midstream energy business. The partnership focuses primarily on the U.S. Gulf Coast region and operates through four business segments:
Terminalling & Storage: Provides terminalling, storage, and packaging services for petroleum products and by-products through 26 marine shore-based terminal facilities and 14 specialty terminal facilities.
Natural Gas Services: Provides natural gas transportation and distribution services, as well as natural gas storage.
Sulfur Services: Gathering, processing, manufacturing, marketing, and distribution of sulfur and sulfur-based products, including fertilizer manufacturing and distribution.
Marine Transportation: Provides marine transportation services for petroleum products and by-products domestically along inland waterway systems, and internationally through the Caribbean, Central America, and South America.
Compared to some tech company trying to make “the next big thing,” Martin Midstream Partners’ business looks a bit boring. However, that boring business is capable of generating some exciting cash distributions.
Right now, the partnership pays quarterly distributions of $0.50 per unit, which comes out to an annual yield of 12.9%.
To put it in perspective, the average dividend yield of all S&P 500 companies stands at just 1.87% at the moment. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed April 26, 2018.)
In other words, investors purchasing MMLP stock today would be locking in a yield nearly seven times the benchmark’s average.
Generous Dividends Backed by a Rock-Solid Business
As I mentioned earlier, whenever investors see a double-digit yielder in today’s market, there will likely be some concern about its dividend safety.
However, even though most high-yield stocks are not the safest bets, Martin Midstream Partners actually runs a solid business.
You see, while MMLP is an energy stock, the partnership does not have any exploration or production business. As a matter of fact, management expects more than 60% of the partnership’s adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) in 2018 to come from fee-based operations. (Source: “2018 Financial Guidance & Operational Overview,” Martin Midstream Partners L.P., February 21, 2018.)
The neat thing about MMLP’s fee-based contracts is that they include take-or-pay, reservation, and minimum-volume commitments. Through these contract terms, Martin Midstream Partners can generate a steady stream of cash flow no matter what oil and gas prices are doing.
Therefore, by running fee-based operations, the partnership has significantly reduced its exposure to commodity price volatility.
Just take a look at the partnership’s financials and you’ll see what I mean.
Oil and gas prices are far from making a full recovery. But in 2017, Martin Midstream Partners still generated a distributable cash flow of $91.1 million. Considering that the partnership paid total cash distributions of $76.9 million for the year, it achieved a distribution coverage ratio of 1.18 times, leaving a margin of safety. (Source: “Martin Midstream Partners Reports 2017 Fourth Quarter Financial Results,” Martin Midstream Partners L.P., February 14, 2018.)
And things turned out to be even better so far this year. In the first quarter of 2018, Martin Midstream Partners’ distributable cash flow came in at $26.7 million. Given its total cash distribution of $19.6 million for the quarter, the partnership’s distribution coverage ratio comes out to 1.36 times, a very commendable number in the MLP world. (Source: “Martin Midstream Partners Reports 2018 First Quarter Financial Results,” Martin Midstream Partners L.P., April 25, 2018.)
Don’t forget, in order for a partnership to maintain its status as an MLP, it is required to distribute almost all its available cash to unitholders. Therefore, if business conditions improve, Martin Midstream Partners could dish out even bigger distribution payments.
As it stands, MMLP stock’s double-digit yield remains safe.