This 6.8% Yielder Gives Investors a “Raise” Every Three Months
What About This Dividend Growth Stock?
In an era when most companies don’t even pay four percent in dividends, a 6.8% annual yield makes a stock stand out. What’s even more impressive is that this 6.8% yielder has been giving investors a “raise” every three months.
The company I’m talking about is Phillips 66 Partners LP (NYSE:PSXP), a master limited partnership headquartered in Houston, Texas. It was created by multinational energy company Phillips 66 (NYSE:PSX) to own, operate, develop, and acquire crude oil, refined petroleum products, and natural gas liquids pipelines, terminals, and other midstream assets.
Phillips 66 Partners was formed in 2013 and completed its initial public offering (IPO) in the same year. Now, we know that oil prices crashed big-time in the summer of 2014 and have yet to make a full recovery, so what do you think happened to PSXP stock’s payouts?
No, the partnership did not cut back its distributions, even though dividend cuts were common in the energy sector during this period. As a matter of fact, Phillips 66 Partners has increased its cash distribution to investors every quarter since its IPO in July 2013. (Source: “Distribution History,” Phillips 66 Partners LP, last accessed May 6, 2019.)
In other words, despite the downturn in the energy sector, PSXP stock investors essentially got a “pay raise” from the partnership every three months.
The latest distribution hike came last month, when Phillips 66 Partners LP’s general partner declared a cash distribution of $0.845 per common unit. That amount represented an 18.3% increase year-over-year and a 1.2% increase sequentially. Moreover, this marked the partnership’s 22nd consecutive quarterly distribution hike. (Source: “Phillips 66 Partners Increases Quarterly Cash Distribution,” Phillips 66 Partners LP, April 17, 2019.)
Trading at $49.56 apiece, PSXP stock has an annual yield of 6.8%.
Why Phillips 66 Partners LP is Special
So how did this energy partnership deliver so many “pay raises” to investors during an industry-wide downturn?
Well, the answer lies in its fee-based business model.
You see, while PSXP is an energy stock, it does not have any exploration or production business. Instead, the partnership focuses on providing fee-based transportation and midstream services to Phillips 66 and to third-party customers.
In particular, Phillips 66 Partners LP has multiple long-term fee-based contracts with Phillips 66 that also include minimum volume commitments and inflation escalators. As a result, the partnership can generate a predictable stream of cash flow despite commodity price volatility.
Just take a look at the partnership’s latest earnings report and you’ll see why it’s special.
In the first quarter of this year, Phillips 66 Partners generated $226.0 million in distributable cash flow, resulting in a distribution coverage ratio of 1.3 times. That is to say, the partnership generated 30% more cash than what was needed to fund its distributions for the quarter. That’s quite a wide margin of safety. (Source: “Phillips 66 Partners Reports First-Quarter 2019 Earnings,” Phillips 66 Partners LP, April 30, 2019.)
Given the company’s strong distribution coverage and fee-based business model, it should have no problem continuing its track record of payout increases.
The Bottom Line on PSXP Stock
For the most part of the last two years, PSXP stock has been trading sideways. While it’s hard to predict where Phillips 66 Partners LP’s unit price will go exactly, I’m pretty confident that the partnership will continue giving out “pay raises” to investors on a rather frequent basis.