A Double-Digit Yielder You Likely Haven’t Thought About
In a bloated stock market, going after the hottest tickers won’t get you much in terms of yield. That’s why, for investors looking to boost the returns of their income portfolios, some of the down-and-out stocks could be worth checking out.
Today I’m going to show you an ultra-high yielder that most people have never heard of: American Midstream Partners LP (NYSE:AMID).
American Midstream Partners is a master limited partnership (MLP) headquartered in Houston, Texas. It was created in 2009 to own, operate, acquire, and develop a portfolio of midstream energy assets. Through these infrastructure assets, the partnership helps link producers of natural gas, crude oil, natural gas liquids (NGLs), condensate, and specialty chemicals to intermediate and end-use markets.
The first thing to note is that AMID stock has not been a hot commodity. The unit price slipped 18.1% in the past 12 months. Over the last five years, the stock is down a staggering 48%.
One of the consequences of American Midstream Partners stock’s downturn is an elevated distribution yield. The partnership pays quarterly distributions of $0.4125 per unit, which translates to $1.65 per unit on an annualized basis. Trading at around $10.45 per unit, AMID stock offers an annual yield of 15.8%.
Is the American Midstream Partners LP Payout Safe?
Obviously, when you see a yield higher than the vast majority of companies trading in today’s stock market, it’s only natural to ask, “Is the payout safe?”
Well, because American Midstream Partners is a midstream MLP, the key performance metric to look at is distributable cash flow. It is calculated by subtracting interest expense, normalized maintenance capital expenditures, and preferred unit distributions from the partnership’s adjusted earnings before interest, tax, depreciation, and amortization (EBITDA).
Now, let’s compare this MLP’s distributable cash flow to its actual cash distribution.
In 2017, American Midstream Partners’ distributable cash flow came in at $91.1 million. Given its total distribution of $86.2 million paid to limited partners, AMID had a distribution coverage ratio of 1.06 times. (Source: “American Midstream Reports Fourth Quarter and Full Year 2017 Results,” American Midstream Partners LP, March 12, 2018.)
In other words, the partnership earned more than enough cash to meet its distribution obligation.
American Midstream Partners’ cash-generating ability has continued to this year. In the first quarter of 2018, the partnership generated $21.9 million of distributable cash flow. Its limited partner cash distributions totaled $21.7 million for the quarter. Therefore, the distribution coverage ratio came out to 1.01 times. (Source: “American Midstream Reports First Quarter 2018 Results,” American Midstream Partners LP, May 15, 2018.)
For risk-averse income investors, the partnership’s most recent distribution coverage ratio may not seem to leave a wide enough margin of safety. However, keep in mind that, as an MLP, American Midstream Partners is required by law to return most of its available cash to investors through regular distributions.
In fact, this mandatory distribution requirement is one of the reasons why MLPs have become some of the highest-yielding names in today’s stock market.
Stable Business Model
Furthermore, even though AMID stock hasn’t been a popular ticker, the partnership does have a solid business model in place.
Right now, American Midstream Partners owns and operates a diversified portfolio of midstream energy assets. These include 8,200 miles of natural gas, crude oil, NGL, and saltwater pipelines—as well as six terminal sites with around 6.7 million barrels of aggregate storage capacity. (Source: “2018 MLP & Energy Infrastructure Conference,” American Midstream Partners LP, May 23, 2018.)
On top of that, AMID has seven natural gas processing plants with approximately one billion cubic feet per day of natural gas treating and processing capacity. Moreover, the partnership has four fractionation facilities, with total fractionation capacity of around 110 million barrels per day.
These assets are strategically positioned at some of the most prolific producing regions, such as the Permian Basin, Eagle Ford Shale, and Bakken Shale, among others. With production on the rise from these areas, American Midstream Partners’ business could get a solid boost.
Another thing to note is that these midstream infrastructure assets, especially pipelines, are quite expensive to build. And even if you have the money, there are a lot of regulatory hurdles to jump through before construction can start.
As a result, pipeline operators often enjoy monopoly status in their operating regions. With thousands of miles of energy pipelines, American Midstream Partners is well positioned to earn oversized profits.
The operations are also quite stable. The partnership does not drill any new wells. Instead, it generates most of its cash flow from fee-based or fixed-margin businesses. Therefore, while oil and gas prices may continue to fluctuate, American Midstream Partners could still generate a predictable stream of cash flow.
Bottom Line on American Midstream Partners LP
With a solid business model, stable operations, and fully-covered distributions, AMID stock’s 15.8% yield could be an opportunity.