NGL Stock: Is This 13.3% Yield Too Good to Be True?
Check Out This Beaten-Down High Yielder
In an era where most companies struggle to come up with a five-percent payout, a double-digit dividend yield may seem too good to be true. That’s why today, we’re going to take a look at one of the highest yielders in the market and examine its dividend safety.
The stock in question is NGL Energy Partners LP (NYSE:NGL), a master limited partnership (MLP) headquartered in Tulsa, Oklahoma. The partnership has a quarterly distribution rate of $0.39 per unit, which translates to an annual yield of 13.3%.
At first glance, NGL Energy Partners looks just like another beaten-down name in the energy sector. Owning and operating a vertically integrated energy business, the partnership completed its initial public offering (IPO) back in 2011. NGL stock had a good run from its IPO to the summer of 2014. But after oil and gas prices crashed that summer, NGL stock plunged and has yet to make a meaningful recovery.
Its distribution history is also less than stellar. While NGL Energy Partners grew its quarterly distribution rate from $0.3375 per unit in 2011 to $0.64 per unit in January 2016, it had to cut its payout back to $0.39 per unit in April 2016. The partnership has maintained that $0.39-per-unit payout to this day.
The distribution coverage wasn’t that great, either. In NGL Energy Partners’ fiscal year 2018, which ended March 31, it generated $180.0 million in distributable cash flow. (Source: “NGL Energy Partners LP Announces Fourth Quarter and Fiscal 2018 Financial Results and Initiates Fiscal 2019 Guidance,” NGL Energy Partners LP, May 30, 2018.)
In the MLP business, distributable cash flow is a key performance metric. NGL defines this metric by taking adjusted earnings before interest, tax, depreciation, and amortization (adjusted EBIDTA), then subtracting maintenance capital expenditures and income tax expenses, among others.
The problem was, NGL Energy Partners paid out $225.0 million in cash distributions in its fiscal year 2018. So its distributable cash flow of $180.0 million didn’t provide enough coverage for the payout.
However, since investing is a forward-looking business, the important question is whether things would improve for the current fiscal year. And on that front, there has been some good news.
In the first quarter of NGL Energy Partners’ fiscal year 2019, which ended June 30, the partnership generated adjusted EBITDA of $80.3 million, representing a 106% increase year-over-year. (Source: “NGL Energy Partners LP Announces First Quarter Fiscal 2019 Financial Results,” NGL Energy Partners LP, August 7, 2018.)
Another huge improvement was the partnership’s distributable cash flow, which came in at $23.4 million for the quarter. In the year-ago period, NGL’s distributable cash flow was negative $14.4 million.
Furthermore, management expects NGL Energy Partners to generate total distributable cash flow of over $300.0 million in full-year fiscal 2019. Since NGL stock is on track to pay total distributions of approximately $235.0 million for the year, meeting the expectation would result in a distribution coverage ratio of around 1.3 times. (Source: “Investor Presentation,” NGL Energy Partners LP, last accessed September 10, 2018.)
Compared to what the partnership had achieved in previous years, a 1.3-times distribution coverage ratio would represent a significant improvement in terms of dividend safety.
The Bottom Line on NGL Energy Partners LP
Don’t forget that while NGL is a beaten-down stock, the partnership still runs a solid energy business. NGL operates through four main segments: Crude Oil Logistics, Water Solutions, Liquids, and Refined Products and Renewables. Rather than drilling new wells, the partnership focuses primarily on businesses that generate long-term fee-based cash flows, such as the transportation and storage and crude oil.
Bottom line: if NGL Energy Partners can generate as much distributable cash flow as its management predicts, its 13.3% yield would be safe.