This High-Yield Stock Is One to Think About
The broad indices of the U.S. stock market have soared to new heights, but not every sector has recovered from the sell-off earlier this year. Many energy stocks, for instance, are still trading at a fraction of where they were before the COVID-19 pandemic. And due to the inverse relationship between dividend yield and stock price, the yield from energy stocks can be very attractive.
Check out Phillips 66 Partners LP (NYSE:PSXP), for instance.
The Houston, TX-based master limited partnership (MLP) was created by energy giant Phillips 66 (NYSE:PSX) to own, operate, develop, and acquire primarily fee-based, crude oil, refined petroleum products and natural gas liquids pipelines, terminals, and other midstream assets. At the time of this writing, Phillips 66 Partners stock was trading at less than half of what it was in the beginning of this year.
Unsurprisingly, the tumble in PSXP stock’s price gave a huge boost to its yield, which now stands at 12.2%.
Of course, in today’s low-yield market, any dividend yield in the double-digits can seem like a red flag. Many ultra-high yielders have a history of reducing their payouts to shareholders. And in this year’s extraordinary operating environment, dividend cuts certainly haven’t been uncommon, especially in the volatile energy sector.
But here’s the thing: while Phillips 66 Partners stock is a high-yield energy stock, the company did not cut back its distribution to investors, despite the impact from the pandemic. In fact, since the partnership was founded in 2013, it has never reduced its payout. (Source: “Distribution History,” Phillips 66 Partners LP, last accessed December 14, 2020.)
Better yet, from 2013 to the first quarter of 2020, Phillips 66 Partners LP was delivering quarterly distribution hikes. Then management simply maintained the quarterly cash payout at $0.875 per unit until this day. To put that in perspective, the amount is 312% higher than the MLP’s initial quarterly distribution rate of $0.2125 per unit.
To evaluate the distribution safety of an MLP, one of the key metrics to look at is distributable cash flow. By comparing distributable cash flow to actual cash distributions paid for a given reporting period, we can see whether the partnership generated enough cash to cover its payout.
In the second quarter of 2020, which was one of the most challenging periods for the energy sector, Phillips 66 Partners generated $218.0 million in distributable cash flow. While the amount was down from the $269.0 million the company earned in the first quarter, it provided 1.09 times coverage for the $200.0 million of cash distributions the partnership paid for the second quarter. (Source: “Phillips 66 Partners Reports Second-Quarter 2020 Financial Results,” Phillips 66 Partners LP, July 31, 2020.)
In the third quarter, the energy sector was not fully out of the woods, but there were solid improvements. And Phillips 66 Partners’ financials certainly reflect that. The partnership’s third-quarter distributable cash flow totaled $243.0 million, marking an 11.5% increase sequentially. The amount also resulted in a stronger distribution coverage ratio of 1.22 times. (Source: “Phillips 66 Partners Reports Third-Quarter 2020 Financial Results,” Phillips 66 Partners LP, October 30, 2020.)
So, the MLP seems to be doing better and covering its oversized payouts just fine, which prompts the question of why the PSXP stock price remains subdued.
Well, stocks can move for a million reasons. But one notable area of uncertainty surrounding Phillips 66 Partners stock is the Dakota Access Pipeline (DAPL)—in which the partnership has a 25% stake. Earlier this year, the U.S. District Court for the District of Columbia ordered the pipeline to shut down. The owners appealed and the pipeline has remained open—for now.
Regarding this issue, Phillips 66’s executive vice president. Timothy Roberts. said the following in the company’s latest earnings conference call:
Let me talk about DAPL real quick. Really, nothing’s changed. We still had two items that need to be addressed by district court and an appellate court in DC. We fully expect that those will be addressed based on the briefing schedule we’ve seen, sometime towards the end of the year, maybe rolling into early next year, but we expect them both around the same time. But regardless of what happens, our expectation is that they’re likely going to get appeals. So I think the process is one of an appeals process that likely goes forward.
(Source: “Phillips 66 Partners LP (PSXP) Management on Q3 2020 Results – Earnings Call Transcript,” Seeking Alpha, October 30, 2020.)
Bottom Line on Phillips 66 Partners LP
As is the case with most energy-industry stocks, there are risks associated with investing in pipeline companies.
But if Phillips 66 Partners can continue maintaining its oversized distributions, PSXP stock’s 12.2% yield would be very hard to ignore for aggressive income-seeking investors.