PBF Logistics LP: This 9.2% Yield Grows Every Three Months
Top Dividend Growth Stock You Likely Haven’t Thought Of
Most people have never heard of PBF Logistics LP (NYSE:PBFX), but the stock offers one of the biggest payouts in the current market.
The best part is, while investors are often faced with the trade-off between current income and future growth, PBF Logistics LP manages to offer both.
Let me explain.
PBF Logistics LP is a master limited partnership (MLP) headquartered in Parsippany, New Jersey. It was created by PBF Energy Inc (NYSE:PBF) to own, lease, operate, develop, and acquire crude oil and refined petroleum products, terminals, pipelines, storage facilities, and other logistics assets.
PBFX stock completed its initial public offering (IPO) on May 9, 2014. Given what happened to the energy sector later on, that was probably not the best time to enter the business. Oil prices crashed big-time in the summer of 2014 and are still far away from making a full recovery.
When the partnership went public, it had a minimum quarterly distribution rate of $0.30 per unit. Its first distribution, paid on August 29, 2014, was a pro-rated payment of $0.16 per unit, corresponding to that minimum quarterly distribution rate.
Now, what do you think happened to PBFX stock’s distributions since then?
Nope, the partnership did not cut its payout. PBF Logistics made its first full-quarter distribution of $0.30 per unit on November 28, 2014. Since then, the partnership has been raising its payout every single quarter. (Source: “PBF Logistics LP Dividend Date & History,” Nasdaq, last accessed November 12, 2018.)
Note that, during the commodity price downturn, dividend cuts were not uncommon at oil and gas companies. PBFX stock’s consistently rising distributions during this rough time serve as a real sign of strength.
PBF Logistics LP Offers Safe and Generous Income Stream
PBF Logistics’ latest payout hike came last month, when the board of directors of its general partner declared a regular quarterly cash distribution of $0.50 per unit, representing a one-percent increase from its previous payment. The new distribution will be paid on November 30 to unitholders of record as of November 15. (Source: “PBF Logistics Increases Quarterly Distribution to $0.50 per Unit and Announces Third Quarter 2018 Earnings Results,” PBF Logistics LP, October 31, 2018.)
This announcement marked the partnership’s 16th consecutive quarterly distribution increase. Compared to the minimum quarterly distribution rate set out at its IPO, PBF Logistics’ per-unit distribution has grown by a total of 66.7%.
Raising one’s payout every three months in a hostile commodity price environment may not seem like the safest move for an energy business. But at PBF Logistics LP, the distributions are more than solid.
You see, on the same day as its latest payout increase, the partnership also reported earnings. Like most MLPs, PBFX reports something called distributable cash flow. The partnership calculates this metric by taking earnings before interest, tax, depreciation, and amortization (EBITDA), adding back non-cash unit-based compensation expenses, and then subtracting net cash paid for interest, maintenance capital expenditures, and income taxes.
As risk-averse income investors, we want to see an MLP that can generate more distributable cash flow than its actual cash payout.
And that’s exactly what PBFX has been doing. In the third quarter of 2018, PBF Logistics generated $28.5 million in distributable cash flow while paying out $26.7 million in actual distributions. Therefore, the company achieved a coverage ratio of 1.07 times, leaving a margin of safety. (Source: Ibid.)
In the first nine months of this year, the partnership’s distributable cash flow totaled $82.9 million. Its total cash distributions, on the other hand, were $76.8 million. That translated to a coverage ratio of 1.08 times. So again, the payout remained safe.
PBFX Stock a Rare Find in Energy Sector
A key reason why PBF Logistics managed to achieve all this is its stable business model.
While the partnership operates in the energy sector, it doesn’t drill any new wells. Instead, it provides logistics services mostly through long-term contracts with minimum-volume commitments. Thanks to these contracts, the partnership has virtually no direct commodity price exposure and can run a stable business through thick and thin.
It helps that the partnership has PBF Energy as its sponsor. PBF Energy is the fifth-largest and the second-most complex independent refiner in the country. It has five refineries and 884,000 barrels per day of processing capacity. (Source: “Investor Presentation May 2018,” PBF Logistics LP, last accessed November 7, 2018.)
Obviously, providing services to its major refiner sponsor adds further stability to PBF Logistics’ business model. At the same time, PBF Energy could also provide the partnership with drop-down acquisition opportunities.
At the end of the day, a safe yield of over nine percent is already a rare find in the current market. Adding the fact that the payout grows every three months, PBFX stock deserves the attention of income investors.