CrossAmerica Partners LP: This 10.4% Yielder Is Not Perfect, But I Still Like It
If You Want to Earn a Double-Digit Yield, Read This
In today’s market, the blunt reality is that most double-digit yielders are not perfect. After all, when most companies pay less than four percent, a 10% dividend yield should make investors jump on the opportunity. And as they bid up the price, the yield would drop.
In other words, a consistently high dividend yield could be a sign that the company has got some issues. But does that mean investors have to settle for a low yield on their income portfolios?
Not necessarily. Today, I’m going to show you a double-digit yielder that could actually be worth considering: CrossAmerica Partners LP (NYSE:CAPL).
Headquartered in Allentown, Pennsylvania, CrossAmerica is a master limited partnership (MLP). Like most MLPs, CrossAmerica comes from the energy sector. But rather than drilling for oil, the partnership is in the relatively more stable side of the energy business: wholesale motor fuel distribution.
The business is quite easy to understand. CrossAmerica buys unbranded fuel and distributes them at branded prices. It has established relationships with quite a few major oil brands, including Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), Sunoco LP (NYSE:SUN), Marathon Oil Corporation (NYSE:MRO), and Phillips 66 (NYSE:PSX), among others. Right now, the partnership distributes motor fuel to approximately 1,200 locations in the U.S. (Source: “Third Quarter 2017 Earnings Call,” CrossAmerica Partners LP, last accessed January 23, 2018.)
In the energy sector, volatility in commodity prices has been a major concern in recent years. The good news is that CrossAmerica is not drilling new wells, so it doesn’t have to worry too much about the price of oil.
At the same time, the partnership also runs a convenience store business. This further diversifies its income stream.
As a matter of fact, because the demand for gasoline tends to increase when oil prices are low, commodity price downturns may actually boost CrossAmerica’s business. That’s why the partnership is well-positioned to return cash to investors through thick and thin.
Just take a look CAPL stock’s distribution history and you’ll see what I mean. Energy prices fell dramatically since the summer of 2014, yet CrossAmerica has raised its per-share distribution rate in each of the past 14 quarters. (Source: “CrossAmerica Partners LP: Declares 14th Consecutive Quarterly Distribution Increase,” CrossAmerica Partners LP, October 24, 2017.)
Paying $0.6275 per unit on a quarterly basis, CAPL stock offers an annual yield of 10.4%.
Of course, high-yield stocks are not known for their dividend safety. But, in the case of CAPL stock, the partnership actually makes enough money to cover its payout.
In the third quarter of 2017, CrossAmerica generated $21.5 million in distributable cash flow, resulting in a distribution coverage ratio of 1.02 times. (Source: “CrossAmerica Partners LP: Reports Third Quarter 2017 Results,” CrossAmerica Partners LP, November 7, 2017.)
Ideally, I would like to see a wider margin of safety. However, when it comes to stocks paying 10% or more, being able to use cash generated from operations to pay dividends is already quite impressive.
That’s why, even though CAPL stock is not perfect, it still deserves a look for yield-seeking investors.