Why Investors Should Consider This High-Yield Stock
In today’s bloated stock market, the most well-known companies rarely offer a yield of more than five percent. But if you are willing to dig into the not-so-popular sectors, you just might find a solid dividend-paying company with a much more substantial yield.
Case in point, Martin Midstream Partners L.P. (NASDAQ:MMLP) comes from the beaten-down energy sector. It pays generous dividends with a 12.5% annual yield.
Of course, the main reason why energy companies don’t look very appealing right now is the low-commodity-price environment. With the massive drop in oil and gas prices over the last several years, many companies in this industry have been struggling. And if commodity prices remain at subdued levels, quite a few businesses will have no choice but to cut back their dividends.
But the thing is that Martin Midstream Partners is not your average energy company. In fact, the partnership should have no problem keep generating oversized cash flows even if oil and gas prices do not recover in the near term.
How is that possible? Well, that’s because MMLP is not in the upstream business. Instead of drilling new wells, the partnership specializes in providing midstream services.
And by focusing on midstream, MMLP has built a rock-solid fee-based business.
Generous Dividends Backed by a Rock-Solid Business
You see, when independent oil and gas producers have energy products to move and store, they often use third parties to do the job, such as Martin Midstream Partners.
Headquartered in Kilgore, Texas, MMLP’s main business is transporting and storing petroleum products and by-products. Other than energy producers, the partnership also serves independent refiners, chemical companies, and fertilizer manufacturers.
Martin Midstream Partners operates through four business segments: Terminalling and Storage, Natural Gas Services, Marine Transportation, and Sulfur Services.
The neat thing about MMLP’s business is that most of the partnership’s cash flows are generated from fee-based contracts. For instance, in the Natural Gas Services segment, MMLP provides services through multi-year fee-based contracts with a weighted average life of approximately four years. In the Terminalling and Storage segment, the contracts are not only fee-based, but have minimum volume commitments. In Sulfur Services, clients often have to sign multi-year “take or pay” contracts, meaning they either use MMLP’s service or pay the partnership a penalty for not using it.
With these contracts, Martin Midstream Partners can run a stable business even during commodity price downturns. As a matter of fact, approximately 70% of the partnership’s cash flows last year came from fee-based contracts. (Source: “MLPA Investor Conference,” Martin Midstream Partners LP, last accessed October 2, 2017.)
Final Thoughts on This High-Yield Stock
At the end of the day, keep in mind that not all double-digit yielders are safe bets. In order for a high-yield stock to be worth owning for income investors, it needs to offer a level of dividend safety.
The good news is, recent financial results suggest that MMLP generated enough distributable cash flow to cover its quarterly distribution rate of $0.50 per common unit. For full-year 2017, Martin Midstream Partners expects to maintain a distribution coverage ratio of 1.2 times. (Source: “Martin Midstream Partners Reports 2017 Second Quarter Financial Results,” Martin Midstream Partners LP, July 26, 2017.)
If the partnership achieves that coverage ratio, it would leave a sizable margin of safety. Combined with its oversized dividends, MMLP is a high-yield stock that’s actually worth considering in today’s market.
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