A High-Yield Dividend Growth Stock to Think About
Today’s chart highlights one of my favorite income plays in the energy sector, Spectra Energy Partners, LP (NYSE:SEP).
To most people, SEP stock may not sound like a familiar name. However, the partnership has an entrenched position in the midstream energy business.
Headquartered in Houston, Texas, Spectra Energy Partners is a master limited partnership (MLP). It was created by Spectra Energy Corp (NYSE:SE) to own and operate pipeline and storage facilities that connect natural gas and crude oil supply areas to high-demand markets.
The partnership completed its initial public offering (IPO) more than a decade ago. Today, its midstream asset portfolio consists of more than 15,000 miles of transmission pipelines, around 170 billion cubic feet of natural gas storage, and approximately 5.6 million barrels of crude oil storage.
Running pipelines and storage facilities may not seem like an exciting business. However, the business is great for generating stable cash flows.
You see, the energy industry is closely tied to commodity prices, which can be extremely volatile. If a company is a commodity producer, its business would prosper when oil and gas prices are rising and struggle when they fall. But as a midstream operator, Spectra Energy Partners does not have to worry too much about the commodity price cycle. It simply earns a fee for every cubic foot of natural gas that travels through its pipeline and for every barrel of crude it stores.
To make things even better, most of the partnership’s transmission revenue comes from reservation fees. So it can generate a stable and predictable stream of cash flow, which can in return be used to fund its distributions.
Spectra Energy Partners, LP Returning Cash to Investors
And as it turns out, Spectra Energy Partners offers one of the most generous distribution policies among its peers.
Last week, the board of directors of SEP’s general partners declared a quarterly cash distribution of $0.76375 per unit. The amount represented a 1.7% increase sequentially and a seven-percent increase year-over-year. The newly announced distribution will be paid on August 29, 2018 to shareholders of record as of August 15. Trading at $36.95 per unit, Spectra Energy Partners offers investors an annual yield of 8.3%. (Source: “Spectra Energy Partners Reports Second Quarter 2018 Results and Announces 43rd Consecutive Quarterly Cash Distribution Increase,” Spectra Energy Partners, LP, August 2, 2018.)
But the high distribution yield isn’t even the most impressive part about this energy MLP. What really makes SEP stock stand out is that since its IPO in June 2007, the partnership has raised its payout every single quarter. That’s 43 consecutive quarterly distribution increases.
There were two major events that happened since the partnership’s IPO: the Great Recession and the recent commodity price downturn. During these times, there were plenty of companies that cut back their dividends, but Spectra Energy Partners was still raising its payout to investors every three months.
In just the last five years alone, SEP stock’s annual distribution per unit has grown by more than 40%.
SEP Stock Distribution Growth History
(Source: “Distribution History,” Spectra Energy Partners, LP, last accessed August 3, 2018.)
Of course, a high-yield stock from today’s energy sector does not sound like the safest bet. But if you take a closer look at its operations, you’d see that Spectra Energy Partners actually has growing financials to support its rising distributions.
For the second quarter of 2018, Spectra Energy Partners’ ongoing earnings before interest, tax, depreciation, and amortization (EBITDA) came in at $574.0 million, marking a 4.7% increase year-over-year. (Source: “Q2 2018: Financial Results & Business Update,” Spectra Energy Partners, LP, last accessed August 3, 2018.)
Distributable cash flow, a critical measure of an MLP’s operating and financial performance, was $402.0 million in the same quarter—an 8.4% increase from the $371.0 million earned in the year-ago period. Moreover, the amount provided 1.1 times coverage for the partnership’s distribution for the quarter, leaving a margin of safety.
Spectra Energy Partners, LP: More Distribution Hikes to Come
Investors purchasing SEP stock today will likely collect even higher yield on cost than the current 8.3%. That’s because for 2018, the partnership plans to pay total distributions of $3.03 per unit, which would mark an over-seven-percent increase from last year.
At the same time, Spectra Energy Partners is on track to generate ongoing distributable cash flow of between $1.63 billion and $1.67 billion for full-year 2018. This would allow the partnership to achieve a distribution coverage ratio of 1.1 to 1.2 times.
By providing a safe and increasing income stream, SEP stock is a rare find in today’s energy sector.