Little-Known Stock Pays Big Dividends
It’s no secret that income investors like companies that raise their dividends. Therefore, it’s also natural for income investors to stay away from companies that cut their payout. Think about it, if management has reduced the dividend before, they probably wouldn’t be shy about doing it again when time gets tough.
If you follow the rule of ignoring companies that have cut back their dividends, then Martin Midstream Partners L.P. (NASDAQ:MMLP) would not be on your watch list. In October 2016, the partnership reduced its quarterly distribution rate from $0.8125 per unit to $0.50 per unit, representing a 38.5% cut. (Source: “Cash Distribution History,” Martin Midstream Partners L.P., last accessed October 4, 2018.)
However, you might want to give this Kilgore, Texas-based energy partnership a second look. The reason is simple: If MMLP can keep paying what it’s paying right now, unitholders can earn some serious cash returns.
How big are those returns?
Well, with Martin Midstream Partners L.P. trading at $11.66 per unit, the partnership offers an annual yield of 17.2%.
And keep in mind that the yield comes from four quarterly distribution checks mailed out to investors. These are cash returns that don’t depend on the views of other market participants. The stock could go down or up, but management won’t need the stock market’s approval to send out distribution checks.
The big question, of course, is whether the payout is safe this time around.
Martin Midstream Partners L.P.: Covering Oversized Distributions
The first thing to note is that while Martin Midstream Partners comes from the energy sector, it focuses on providing midstream services. The partnership operates through four segments: Natural Gas Services, Terminalling & Storage, Sulfur Services, and Marine Transportation.
MMLP’s business is fee-based and often done through multi-year contracts. This allows the partnership to generate relatively stable cash flows despite volatility in commodity prices.
Martin Midstream Partners cut back its payout in October 2016. In 2017, the partnership generated $91.1 million in distributable cash flow, which was $0.8 million more than what management had expected. Most importantly, the amount provided 1.18 times coverage of its total distributions for the year. (Source: “Martin Midstream Partners Reports 2017 Fourth Quarter Financial Results,” Martin Midstream Partners L.P., February 14, 2018.)
In other words, in the calendar year after the distribution cut, the partnership generated more than enough cash to cover its payout.
That was a good start. And in the first quarter of 2018, things got even better: MMLP achieved a distribution coverage ratio of 1.36 times, leaving a wide margin of safety. (Source: “Martin Midstream Partners Reports 2018 First Quarter Financial Results,” Martin Midstream Partners L.P., April 25, 2018.)
More recently, the partnership reported a distribution coverage ratio of 0.56 times for the second quarter of 2018. While the number seems disappointing, it included a one-time negative inventory adjustment in the fertilizer division of the partnership’s Sulfur Services segment.
Going forward, management expects the partnership to achieve a distribution coverage ratio of 1.00 times in full-year 2018. (Source: “Martin Midstream Partners Reports 2018 Second Quarter Financial Results,” Martin Midstream Partners L.P., July 25, 2018.)
Bottom Line on Martin Midstream Partners L.P.
There you have it. MMLP stock is not perfect. But if the partnership can continue to cover its payout as management forecasted, its 17.2% yield would be very difficult to ignore.