Should Investors Consider This Double-Digit Yield?
Nobody likes dividend cuts. But unfortunately, with the COVID-19 pandemic causing historic setbacks in the economy this year, it hasn’t been unusual to see companies reduce their cash payouts to investors.
The good news is, while the pandemic has not ended, the economy has started to recover. And if things keep on improving, some of the high-yield stocks that cut back their dividends earlier might be worth considering again.
Check out Enable Midstream Partners LP (NYSE:ENBL), for instance. Founded in 2013, Enable Midstream is a master limited partnership (MLP) that owns, operates, and develops strategically located natural gas and crude oil infrastructure assets.
Right now, the partnership’s portfolio consists of approximately 14,000 miles of natural gas, crude oil, condensate, and produced water gathering pipelines; 7,800 miles of interstate pipelines; 2,200 miles of intrastate pipelines; around 2.6 billion cubic feet per day of natural gas processing capacity; and seven natural gas storage facilities comprising 84.5 billion cubic feet of storage capacity.
Like for most energy stocks, 2020 has not been a great year for Enable Midstream Partners stock. The partnership’s unit price is about 40% lower than where it was in the beginning of the year, and its cash distribution per unit was slashed in half. (Source: “Distribution History,” Enable Midstream Partners LP, last accessed December 4, 2020.)
Still, with a quarterly payout of $0.165 per unit and a unit price of $5.88, ENBL stock offers an annual distribution yield of 11.3%. That makes it one of the highest-yielding stocks in today’s market.
Obviously, when the economy was in the doldrums and oil prices were crashing due to the pandemic, an ultra-high-yielding energy stock seemed very risky. Today, there are still risks involved in investing in the energy sector. But here’s the thing: if you go over the numbers in the company’s latest financial report, you’ll see that Enable Midstream Partners stock could be worth a serious look.
In the third quarter of 2020, Enable Midstream Partners LP generated $147.0 million in distributable cash flow (DCF). The amount was down quite a bit year-over-year. However, because the partnership paid $72.0 million to common unitholders for the quarter, its DCF exceeded those distributions by $75.0 million. In other words, the MLP covered its payout more than twice over. (Source: “Enable Midstream Announces Third Quarter 2020 Financial and Operating Results,” Enable Midstream Partners LP, November 4, 2020.)
During the first nine months of this year, Enable Midstream earned $509.0 million in DCF. Considering that the partnership paid total cash distributions of $216.0 million for this period, it achieved a distribution coverage ratio of 2.36 times. So again, there was a fairly wide margin of safety.
In Enable Midstream’s third-quarter earnings conference call, the company’s chief financial officer, John Laws, said, “The business has generated significant cash flows this year to fully fund our distribution and capital program while reducing total debt levels and we remain focused on further optimizing our cost structure and aligning it with the industry environment.” (Source: “Enable Midstream Partners, LP (ENBL) CEO Rod Sailor on Q3 2020 Results – Earnings Call Transcript,” Seeking Alpha, November 4, 2020.)
It helps that Enable Midstream runs a largely fee-based business. The partnership operates through two main segments: Transportation and Storage, and Gathering and Processing.
In the company’s Transportation and Storage segment, 100% of its gross margin is derived from fee-based contracts. In the Gathering and Processing segment, about four-fifths of its gross margin is derived from fee-based operations. (Source: “Fourth Quarter Investor Presentation | December 2020,” Enable Midstream Partners LP, last accessed December 4, 2020.)
Relying on fee-based operations should result in predictable cash flows for the partnership in spite of volatility in commodity prices.
Furthermore, Enable Midstream has a large, diverse, and high-quality customer base. The MLP serves many investment-grade companies (or their affiliates), such as American Electric Power Company Inc (NASDAQ:AEP), BP plc (NYSE:BP), and Continental Resources, Inc. (NYSE:CLR). Having high-quality customers can help reduce its counterparty risk. In the partnership’s fourth-quarter investor presentation, Enable Midstream said it had not experienced meaningful credit losses to date.
Bottom Line on Enable Midstream Partners LP
I’d like to remind you once again that investments in the energy sector can be risky.
But given the recent developments at Enable Midstream Partners LP, ENBL stock’s 11.3% yield might be worth a look.