Sunoco LP: This Turnaround Stock Yields 12.8%
June 18, 2018
Rare Chance to Get a 12% Yield
I like investing in turnarounds.
From time to time, great businesses might find themselves in trouble. During these periods, you can often scoop up wonderful assets with double-digit yields.
Of course, higher yields come with higher risk. Not all turnarounds work out. But if you can stomach the uncertainty, these situations can present lucrative opportunities.
Case in point: wholesale gasoline distributor Sunoco LP (NYSE:SUN). Over the last few years, executives spent billions of dollars on acquisitions. Those actions left the partnership mired in debt, which some analysts feared could put the distribution at risk.
That situation has started to change, however. And with a distribution yield topping 12.8%, shareholders are getting well compensated for the risk they’re taking. Investors should take note.
Sunoco has taken a number of actions to shore up its balance sheet. Last year, for instance, management began slashing costs, selling off assets, and paying down debt. Their biggest move came in January, when executives closed a $3.3-billion deal with 7-Eleven to sell the vast majority of their retail fuel locations and attached convenience stores.
Those efforts have put a big dent in Sunoco’s debt load. The partnership now has $3.9 billion in outstanding liabilities, down from $6.2 billion last year. Never mind the millions of dollars saved in interest payments each quarter.
The deal also makes Sunoco’s business more predictable. Retail sales suffer from wild swings year to year. People, after all, tend to buy fewer overpriced snacks and sodas during a recession. That combination of volatile sales and a big debt load looked like a train wreck waiting to happen. By exiting this business, Sunoco solved two big problems at once.
These efforts should put the distribution on a more solid foundation, too. Today, Sunoco pays out a quarterly distribution of $0.83 per unit. That comes out to an annual yield of 12.8%. Last year, those payments far exceeded the profits generated by the business. By last quarter, however, the partnership generated $1.15 of cash flow on every dollar paid out in distributions.
Unfortunately, some of those profits also came from Sunoco’s retail business. But with those operations now sold off, management will have less in the way of cash flow to pay investors. They have to thread a needle of better asset sales, debt payments, and distributions to shareholders.
So, you have a lot of “ifs” here. If the oil markets cooperate, margins should remain strong. And if it can absorb the loss of its convenience-store income, the partnership should continue to pay distributions. And if interest rates stay low, the partnership should be able to manage its debt load.
So clearly, you can’t call the name a slam dunk. But if management can answer all of these questions, this turnaround play could surge in value. In the meantime, Sunoco’s 12.8% yield well compensates investors for the risks they’re taking.
