While Not Perfect, this 17% Yielder Deserves a Look
This Beaten-Down Stock Provides an Oversized Yield
In a bloated stock market, the highest-yielding names tend to be down-and-out tickers.
This shouldn’t come as a surprise. A company’s dividend yield is calculated by dividing its annualized payout by its share price. So at a given cash dividend rate, the lower the stock price, the higher the yield becomes.
And sometimes, the magnitude of the share price drop is so large that even after a dividend cut, a stock could still offer a staggeringly high yield.
One such stock is that of Summit Midstream Partners LP (NYSE:SMLP), a master limited partnership (MLP) headquartered in The Woodlands, Texas.
On February 26, 2019, the partnership announced that it would reduce its quarterly cash distribution from $0.575 per unit to $0.2875 per unit. That was a cut of 50%. (Source: “Summit Midstream Partners, LP Announces Strategic Actions to Simplify Structure, Improve Distribution Coverage, Enhance Credit Profile and Drive Unitholder Value; Appoints Leonard Mallett as Interim Chief Executive Officer,” Summit Midstream Partners LP, February 26, 2019.)
Market participants didn’t like the news. On the day of the distribution cut announcement, SMLP stock tanked 19%.
The tumble did not stop there, as the partnership’s unit price continued to fall. Today, SMLP stock trades at just $6.77 apiece, marking a total drop of 47.6% from its February announcement.
Now, given the inverse relationship between a company’s dividend yield and stock price, the massive plunge in SMLP stock has made it one of the highest yielders in the market.
How high is that yield? Well, as of this writing, Summit Midstream Partners LP offers investors an annual distribution yield of 17%.
Summit Midstream Partners LP (NYSE:SMLP) Stock Chart
Chart courtesy of StockCharts.com
Looking further back, we see that over the past 12 months, the unit price of Summit Midstream Partners LP has dropped a whopping 57%. In other words, this is a classic example of how a beaten down stock can offer a sky-high yield.
The big question now, of course, is whether investors can count on that jaw-dropping yield.
To find out the answer, let’s take a look at the partnership’s financials.
Can Investors Count on this Ultra-High Yielder?
Summit Midstream Partners LP provides natural gas, crude oil, and produced water gathering services. Like many of its peers, the MLP reports something called “distributable cash flow.” In order for its distributions to be considered safe, the MLP needs to generate a distributable cash flow that’s greater than its actual payout.
In 2018, Summit Midstream Partners LP generated $179.3 million in distributable cash flow while declaring $180.9 million in actual cash distributions. Therefore, the partnership fell short of covering its payout last year. (Source: “Summit Midstream Partners, LP Reports Record Fourth Quarter and Full Year 2018 Financial Results and Provides 2019 Financial Guidance,” Summit Midstream Partners LP, February 26, 2019.)
And as we already know by now, the lack of distribution coverage at Summit Midstream Partners LP has led to a distribution cut.
After the payout reduction, though, things started to look better. In the first quarter of 2019, the partnership generated $40.2 million in distributable cash flow. Its declared cash distributions, on the other hand, totaled just $23.8 million. That translated to a distribution coverage ratio of 1.69 times, meaning the company generated 69% more cash than what was needed to meet its distribution obligations for the quarter. (Source: “Summit Midstream Partners, LP Reports First Quarter 2019 Financial Results,” Summit Midstream Partners LP, May 9, 2019.)
Looking ahead, management said that they expect SMLP to achieve a distribution coverage ratio of 1.75 times to 1.95 times in full-year 2019. If the partnership achieves this guidance range, its current cash distribution rate would be safe.
Good Value for Money?
Last but certainly not least, with such a huge tumble in unit price, SMLP stock might be able to offer good value for the money.
At an investor presentation earlier this month, management noted that based on their 2019 adjusted earnings before interest, tax, depreciation and amortization (EBITDA) guidance, SMLP stock has an enterprise-value-to-EBITDA multiple of 8.2 times.
Meanwhile, the partnership’s peer group—which includes Crestwood Equity Partners LP (NYSE:CEQP), DCP Midstream LP (NYSE:DCP), EnLInk Midstream LLC (NYSE:ENLC), Enable Midstream Partners LP (NYSE:ENBL), and Targa Resources Corp (NYSE:TRGP)—has an average enterprise value-to-EBITDA multiple of 10.3 times. (Source: “SunTrust Robinson Humphrey Midstream Summit,” Summit Midstream Partners LP, last accessed June 17, 2019.)
Like most beaten-down ultra-high yielders, Summit Midstream Partners LP is not perfect. But with strong coverage on its reduced distribution rate and a lower valuation multiple compared to its peers, SMLP stock still deserves a spot on income investors’ watchlist.