Martin Midstream Partners L.P.: This 15.8% Yield Just Got Upgraded
February 14, 2019
An Upgraded 16% Yielder
Martin Midstream Partners L.P. (NASDAQ:MMLP) is one of the most popular stocks readers ask me to review. And you don’t need a PhD to figure out why.
Units of the master limited partnership pay a 15.8% dividend yield. In a world where most dividend stocks pay only two or three percent, this distribution looks irresistible.
However, I’ve always hesitated to slap a “buy” rating on this business. Management has always paid out a bit more in distributions than they made in cash flow. And if you follow dividend stocks, you know that’s a recipe for disappointment.
But in recent months, several developments have forced me to reevaluate this partnership. And surprisingly, I like what I see. Let’s dig into the financials.
At first glance, Martin Midstream Partners L.P. looks like a disaster in the making. Low energy prices hammered the partnership’s storage business. As traders drew down inventories, Martin started to see its cash flows dry up.
Through the first nine months of 2018, MMLP generated $1.12 per unit in distributable cash flow. Over the same period, management paid out $1.50 per unit in distributions.
Executives made up the difference by draining cash reserves and issuing debt.
Needless to say, no company can sustain that formula for long. And once Wall Street clued in, traders started to panic.
But the story has started to change.
Late last year, the partnership purchased Martin Transport, Inc. for $135.0 million. The company, which carries petroleum and chemical products, owns 23 terminals throughout the Gulf Coast and Midwest.
The transaction will provide a real shot in the arm for Martin Midstream Partners L.P.’s profitability. According to management, the deal will add approximately $23.6 million in annual earnings before interest, taxes, depreciation, and amortization (EBITDA). Executives also see a lot of growth potential in the upcoming years, thanks in large part to America’s booming shale industry.
The deal will also put Martin’s distribution on a much more solid foundation. According to projections by management, the extra cash flow will reduce the partnership’s payout ratio to 83% in 2019. Any rebound in the energy market, which we’ve started to see in recent months, could drop that metric even lower.
To be clear, this partnership still faces a lot of problems.
Red tape has tied up several expansion projects. Management has taken on a lot of debt, which could backfire if interest rates keep rising.
And of course, these financial projections assume Martin can integrate this new business into its operations. Executives often overestimate the opportunities to cut costs to justify their acquisitions.
Martin Midstream Partners L.P. remains speculative. The recent announcement, however, provides a ray of hope. Income investors with an iron stomach may want to give MMLP a second look, like I did.
