Looking for Oversized Dividends? Read This
As a risk-averse income investor, I tend to stick with large-cap, blue-chip stocks in turbulent times like this. However, every once in a while, you come across a smaller stock with a yield so high that it’s impossible not to take a deeper look.
The stock in question is USA Compression Partners LP (NYSE:USAC), a master limited partnership (MLP) headquartered in Austin, Texas. Today, the most well-known MLPs tend to be pipeline operators. USAC, on the other hand, is a provider of natural gas compression services. Compression is an essential part of the natural gas industry because, in order to move natural gas into pipelines and processing infrastructure, it needs to be compressed first.
And even though USA Compression stock is a small-cap stock—the partnership has a market capitalization of around $1.2 billion—it is actually one of the largest independent providers of natural gas compression services in the U.S. in terms of total compression fleet horsepower. The MLP serves a wide range of customers, including natural gas and crude oil producers, processors, gatherers, and transporters. (Source: “Credit Suisse Energy Summit,” USA Compression Partners LP, March 2, 2020.)
Having a diverse customer base is great for managing counterparty risk, especially in the volatile energy industry. Last year, no single customer accounted for more than eight percent of USA Compression Partners’ recurring revenue. Over the last 15 years, the partnership has only written off about $1.8 million in bad debt; that’s only 0.06% of the MLP’s approximate $3.1 billion total billings for the period.
Of course, as I mentioned earlier, the reason we’re checking out USA Compression Partners LP is the sheer size of its payout to investors. At the moment, the partnership is paying a quarterly cash distribution of $0.525 per unit. With USAC stock trading at $12.12 per unit, that quarterly rate comes out to an annual yield of 17.3%.
I should point out that MLPs are pass-through entities. As long as an MLP distributes most of its available cash to investors, it pays little to no income tax at the corporate level. Due to this distribution requirement, MLPs have become some of the highest yielders in the market.
With a payout of about 17%, USA Compression stock is impressive even by MLP standards.
USA Compression Partners LP: Is the Distribution Safe?
Now, we know that the energy industry has not been in the best shape due to the COVID-19 pandemic. So the big question is, can this high-yield stock afford its payout?
Well, the MLP reported financial results on August 4. The report showed that, in the second quarter of 2020, USA Compression Partners generated $168.7 million of revenue, down less than 2.9% year-over-year. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) came in at $105.5 million for the quarter, which was actually up 0.76% from the year-ago period. (Source: “USA Compression Partners, LP Reports Second Quarter 2020 Results; Updates 2020 Outlook,” USA Compression Partners LP, August 4, 2020.)
Of course, as is the case with most MLPs, the most important metric for income investors is distributable cash flow. By comparing an MLP’s distributable cash flow to its actual cash distributions paid for a given period, we can see whether it was able to cover the payout.
In the second quarter of 2020, USA Compression Partners LP generated $58.7 million of distributable cash flow. Considering that the MLP paid less than $50.9 million in cash distributions for the quarter, it achieved a distribution coverage ratio of 1.15 times. That is, USAC earned 15% more cash than what was needed to meet its distribution obligation for the quarter.
Given how badly the energy industry was hit by the coronavirus shock, USAC’s second-quarter distribution coverage was pretty impressive.
However, nothing is carved in stone. In the MLP’s second-quarter earnings conference call, President and Chief Executive Officer Eric Long said, “Just as a reminder, the quarterly distribution is a decision that our Board of Directors makes on a quarterly basis. As has always been the case since our [initial public offering], the Board can opt to maintain, reduce, or [suspend] distribution as it deems most appropriate on a quarterly basis.” (Source: “USA Compression Partners’ (USAC) CEO Eric Long On Q2 2020 Results – Earnings Call Transcript,” Seeking Alpha, August 4, 2020.)
Also, management expects that the third quarter of 2020 will be the low point of the current commodity cycle. So it’s yet to be seen whether USA Compression Partners LP can maintain a strong distribution coverage this time around.
Here’s the bottom line: there is uncertainty for USAC stock going forward, but if you don’t mind the short-term risk, the partnership’s jaw-dropping yield would be worth a look.