Should Investors Consider This High-Yield Stock?
Even though past performance does not guarantee future results, investors like to chase the hottest tickers. With the momentum in the U.S. stock market still going strong, many are hoping that the surging share prices can bring them some capital gains.
But if you are an income investor, you might want to check out the not-so-hot sectors of the stock market. Because of the inverse relationship between share price and dividend yield, some of the down-and-out stocks can provide a big boost to the return of an income portfolio.
Martin Midstream Partners L.P. (NASDAQ:MMLP) could be one of them. Headquartered in Kilgore, Texas, Martin Midstream Partners is a publicly traded and diversified energy master limited partnership (MLP). Like most energy stocks, Martin Midstream Partners haven’t been a hot commodity since the downturn in oil and gas prices started in the summer of 2014. Over the last 12 months, MMLP’s unit price plunged 14.9%.
Due the recent tumble, the partnership’s yield has become very attractive. With a quarterly distribution rate of $0.50 per unit, MMLP offers an annual yield of 13.4% at the current price.
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Of course, down-and-out stocks can carry a significant level of risk. Very often, plunging share prices reflect deteriorating fundamentals about a company. If that’s the case, then the company does not deserve income investors’ attention, because with a declining business, the dividends likely won’t be sustainable.
So why would income investors ever consider a beaten-down stock? Well, because sometimes, the downturn in a company’s share price is due to temporary hiccup in its business rather than a permanent problem.
And that is exactly what’s happening with Martin Midstream Partners right now. The partnership reported earnings on October 25, as well as the stock market, did not like what they saw. Both top and bottom lines deteriorated. Even distributable cash flow, a critical measure of an MLP’s performance, was down quite a bit year-over-year.
However, one of the things that negatively affected Martin Midstream Partners’ financials was Hurricane Harvey. In particular, hurricane repair costs came in at $4.9 million. And because Hurricane Harvey also hit some of MLP’s customers, it also disrupted their business, furthering slowing down Martin’s operations. In total, the impact from the hurricane on MLP is estimated to be $6.0 million. (Source: “Martin Midstream Partners Reports 2017 Third Quarter Financial Results,” Martin Midstream Partners L.P., October 25, 2017.)
Other than the one-time impact from Hurricane Harvey, Martin Midstream Partners’ financials were also affected by the seasonality of some its businesses.
You see, most MLPs are pipeline operators. But at Martin, the business is a lot more diversified. The partnership operates through four segments: Natural Gas Services, Terminalling and Storage, Sulfur Services, and Marine Transportation.
In particular, the third quarter is usually the seasonally weakest for MMLP’s fertilizer and butane businesses. This has led to lackluster results from its Sulfur Services and Natural Gas Services segments.
But because these impacts are either temporary or seasonal, financial results in the third quarter may not reflect the partnership’s true capabilities. As a matter of fact, if you take a look at the 12-month period ended September 30, 2017, you’d see that Martin Midstream Partners had achieved a distribution coverage ratio of 1.27 times. This mean it was generating substantially more cash flow than what’s needed to meet its dividend obligations, leaving a margin of safety.
Generous Payout Backed by a Stable Business
And if you are worried about the risk that’s inherent in the energy business, keep in mind that Martin Midstream Partners does not have any exploration or production activity. Instead, the partnership earns fees for providing services. In the Natural Gas Services segment, the business is backed by fee-based, multi-year natural gas storage contracts. In the Sulfur Services segment, MMLP’s business is secured by fee-based, multi-year “take-or-pay” contracts, meaning the customer either uses the partnership’s service or pays a penalty specified in the contract for not using it. (Source: “2017 Wells Fargo MLP Symposium,” Martin Midstream Partners L.P., December 7, 2017.)
A fee-based business may not be very exciting, but it is capable of generating stable cash flows. At Martin Midstream Partners, approximately 70% of cash flows are generated from fee-based contracts that include take-or-pay, reservation, and minimum volume commitments.
MMLP’s business is further secured by its high-quality customer-base. The partnership’s customers include major oil and gas companies, independent refiners, large chemical companies, and fertilizer manufacturers. For instance, Exxon Mobil Corporation (NYSE:XOM), ConocoPhillips (NYSE:COP), and Total SA (NYSE:TOT) are among the MLP’s top 10 revenue contributors.
By running a fee-based business backed by long-term contracts with high-quality customers, Martin Midstream Partners is well positioned to pay recurring dividends. With the recent downturn in its unit price, MMLP stock could represent an opportunity for yield-seeking investors.