Martin Midstream Partners L.P.: Can You Count on This 15% Yield?
This Stock Offers a Big Payout
In this day and age, most analysts would consider a four-percent dividend as “high-yield.” Just do a Google search of “high-yield stocks” and you’ll see plenty of five- and six-percent yielders carrying that title.
So, what should you do when you see a stock with a whopping 15% yield? I’d say approach with caution.
You see, at a given cash payout, a company’s dividend yield moves inversely to its share price. As a result, many double-digit yields are simply by-products of terrible stock price performance.
And stocks often tumble for a good reason. If you are a risk-averse income investor like me, you don’t want to put your money in a deteriorating business, no matter how high its yield has become.
That’s why when I first saw Martin Midstream Partners L.P. (NASDAQ:MMLP) pop up on my radar, I was very skeptical.
The partnership pays quarterly distributions of $0.50 per unit, giving MMLP stock a jaw-dropping yield of 15.1%.
It doesn’t help the case that the partnership has a less-than-stellar distribution history. The current cash payout, despite its sheer size, was the result of a 38.5% distribution cut back in October 2016. Before that, the partnership had a quarterly distribution rate of $0.8125 per unit. (Source: “Cash Distribution History,” Martin Midstream Partners L.P., last accessed January 24, 2019.)
Nobody likes dividend cuts. After the payout reduction, MMLP stock started trending lower and has yet to make meaningful recovery.
But here’s the thing: we know that good performance in the past does not guarantee the same results in the future. Similarly, a stock’s lackluster dividend history doesn’t necessarily mean that everyone should walk away from it.
Will Martin Midstream Partners L.P. Cover Its Payout?
Martin Midstream Partners L.P. is a master limited partnership (MLP) headquartered in Kilgore, Texas. It provides storage, transportation, and distribution services of petroleum products and by-products.
As is the case with most MLPs, the key performance metric for MMLP stock when it comes to payout safety is its distribution coverage ratio. If the ratio is above one, it means the partnership generated more than enough cash to cover its payout in the reporting period.
So, is the payout safe at this ultra-high yielder?
Well, the partnership is yet to release its full-year results for 2018. But in the last earnings report, Ruben Martin, President and Chief Executive Officer of MMLP’s general partner said that “Due to market weakness that has affected fertilizer margins throughout 2018, at this time we are lowering our estimate [for distribution coverage ratio] to approximately 0.90 times at year end 2018.” (Source: “Martin Midstream Partners Reports 2018 Third Quarter Financial Results,” Martin Midstream Partners L.P., October 24, 2018.)
That doesn’t sound good, but note that things are expected to improve substantially.
The catalyst will likely come from Martin Midstream Partners’ recently completed acquisition of Martin Transport, Inc., a company that operates a fleet of tank trucks and owns 23 terminals. The acquisition is expected to add $23.6 million to the partnership’s earnings before interest, tax, depreciation, and amortization, and 14.7 million to its distributable cash flow in the first 12 months of operation.
Thanks to this acquisition, management believes that Martin Midstream Partners L.P. will end 2019 with a distribution coverage ratio of 1.2 times. This means, if the partnership achieves that target, it would generate 20% more cash than what is needed to meet its distribution obligation.