USD Partners LP: Little-Known Stock Now Pays 13.7%
Should Investors Consider This High-Yield Stock?
Most people have never heard of USD Partners LP (NYSE:USDP), but the stock offers one of the biggest payouts in the market.
USD is a master limited partnership (MLP) headquartered in Houston, Texas. It was created by US Development Group LLC in 2014 and went public in the same year. Today, the partnership owns, operates, develops, and acquires energy-related logistics assets, including rail terminals and other complementary midstream infrastructure.
With a market capitalization of less than $300.0 million, USD Partners is a relatively small player in the midstream energy business. And because USDP is also a rather new ticker on the stock market, it hasn’t really gotten much investor attention.
Still, the partnership deserves a serious look for a very simple reason: the sheer size of its payout.
Right now, USDP stock has a quarterly distribution rate of $0.3575 per unit, which comes out to a staggering annual yield of 13.7%.
To put this in perspective, the average S&P 500 company pays less than two percent at the moment. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed December 7, 2018.)
Is the USD Partners Stock Distribution Safe?
With a yield nearly seven times the benchmark’s average, USDP stock may not look like the safest bet. So, let’s dig into the partnership’s financials and see whether it can actually afford the oversized payout.
Like most MLPs, USD Partners reports something called “distributable cash flow.” The partnership calculates it by taking adjusted earnings before interest, tax, depreciation, and amortization (EBITDA), then subtracting net cash paid for interest, income taxes, and maintenance capital expenditures.
By comparing this metric to an MLP’s distributions in a given reporting period, investors can see whether it generated enough cash to cover its payout.
For the third quarter, the partnership generated $11.6 million in distributable cash flow. Given its total distributions of $9.98 million paid for the period, its distribution coverage ratio came out to 1.16 times. (Source: “USD Partners LP Announces Third Quarter 2018 Results And Recent Commercial Developments,” USD Partners LP, November 5, 2018.)
A distribution coverage ratio of greater than one meant USD generated more than enough cash to cover its payout. That’s good.
However, if you take a look at what the partnership was doing a year ago, you’d see that it generated $13.5 million in distributable cash flow in the third quarter of 2017.
In other words, while the company had no problem meeting its distribution obligations in the third quarter of this year, its distributable cash flow actually declined by 14% year-over-year.
Now, before you cross this stock off your watchlist, I should point out that USD Partners does have a management team that’s willing to return cash to investors.
When the partnership was formed, it had a targeted minimum quarterly distribution rate of $0.2875 per unit. Today, USDP’s quarterly payout stands at $0.3575 per unit, representing a total increase of 24.3%. (Source: “Distribution History,” USD Partners LP, last accessed December 7, 2018.)
As a matter of fact, the company has raised its payout for 14 consecutive quarters.
This track record is particularly impressive, given what happened to the energy industry in recent years. When oil and gas prices crashed in the summer of 2014, many energy companies fell deep into the doldrums. Production cuts were often followed by dividend cuts.
USD completed its initial public offering during the commodity price downturn. And as it turned out, the partnership not only survived the crisis, but was paying increasing distributions to unitholders all along.
Also, according to USDP’s latest investor presentation, the partnership earns 98% of its adjusted EBITDA from take-or-pay contracts and two percent from other fee-based businesses. Therefore, the company essentially has no direct commodity exposure and can generate a predictable stream of cash flow. (Source: “USD Partners LP Investor Presentation,” USD Partners LP, last accessed December 7, 2018.)
USDP stock’s declining distributable cash flow is not a good sign, but the partnership’s 13.7% yield may still deserve a look.