A High-Yield, Dividend Growth Stock You Likely Haven’t Considered
Most people have never heard of Holly Energy Partners, L.P. (NYSE:HEP). And that was, in part, due to the stock not being a hot commodity. Since oil prices crashed in the summer of 2014, HEP stock’s performance was lackluster, to say the least.
Over the last five years, the price of Holly Energy Partners shares slipped more than 15%.
However, at any given dividend rate, a company’s dividend yield moves in the opposite direction of its stock price. Therefore, the lack of investor enthusiasm toward HEP stock has made it one of the highest yielders in the business.
Trading at around $29.70 apiece, Holly Energy Partners, L.P. offers an annual distribution yield of 8.8%.
Of course, if yield is your only criterion, you can find companies with even higher payouts than this partnership. What makes HEP stock stand out is its ability to return cash to investors through thick and thin.
Increasing Distributions with Holly Energy Partners, L.P.
You see, Holly Energy Partners was created by independent petroleum refiner and marketer HollyFrontier Corp (NYSE:HFC) back in 2004. The partnership’s main business was to provide petroleum product and crude oil transportation, terminaling, storage, and throughput services to HollyFrontier Corp subsidiaries and third-party customers.
Note that, as a master limited partnership (MLP), HEP is required by law to distribute most of its available cash to investors. When the partnership came into existence in 2004, it had a minimum quarterly distribution rate of $0.25 per unit (split adjusted). Its first distribution of $0.2175 per unit was a prorated payment corresponding to the minimum quarterly distribution rate.
Since then, Holly Energy Partners has raised its payout every single quarter. With its latest payment of $0.655 per unit last month, HEP stock’s quarterly distribution rate has grown 162% since its initial public offering (IPO). (Source: “Distribution History,” Holly Energy Partners, L.P., last accessed June 20, 2018.)
Keep in mind that, a few years after 2004, our economy went through the Great Recession, which many consider to be the biggest downturn since the Great Depression. Also, from 2014 to 2015, oil prices plunged more than 50% and are yet to make a full recovery.
With such dramatic macroeconomic shocks, a steadily increasing stream of cash distributions makes HEP stock stand out. And while most companies would be content with annual dividend increases, this Dallas, Texas-based energy partnership was raising its payout to unitholders every three months.
A Rock-Solid Business
If you are familiar with HEP’s business, the partnership’s impressive distribution history shouldn’t really come as a surprise.
You see, while HEP is an energy stock, it runs a fee-based business. The partnership owns and operates petroleum product and crude gathering pipelines, tankage and terminals in Texas, New Mexico, Arizona, Washington, Idaho, Oklahoma, Utah, Nevada, Wyoming, and Kansas—as well as refinery processing units in Kansas and Utah.
In other words, customers pay Holly Energy Partners a fee to use its transportation, storage, and throughput services. This helps limit HEP’s direct exposure to commodity prices. As a matter of fact, nearly 100% of the partnership’s revenue is fee-based. (Source: “Investor Presentation May 2018,” Holly Energy Partners, L.P., last accessed June 20, 2018.)
Moreover, the partnership has entered into long-term contracts with its major refiner customers. These contracts often require minimum payment obligations for volume. Right now, more than 80% of Holly Energy Partners’ revenue comes from long-term contracts and minimum volume commitments.
Therefore, the partnership is well positioned to generate stable cash flows through thick and thin.
And if you are wondering when those contracts will eventually expire, don’t worry. While the earliest contract will be up for renewal in 2019, it only represents 13% of total customer commitments.
Growing Financials
Of course, in order for a company to continue raising its payout, it needs to also grow its business.
The good news is, that’s exactly what Holly Energy Partners, L.P. has been doing.
In 2017, HEP generated $454.4 million of revenue, representing a 13% increase from the prior year. Distributable cash flow, a critical measure of an MLP’s performance, came in at almost $243.0 million in 2017, up 11% from 2016. (Source: “Holly Energy Partners, L.P. Reports Fourth Quarter Results,” Holly Energy Partners, L.P., February 20, 2018.)
In the first quarter of 2018, Holly Energy Partners’ revenue grew another 22.1% year-over-year to $128.9 million. It also generated 69.1 million of distributable cash flow, representing a 22.0% increase from the first quarter of 2017. (Source: “Holly Energy Partners, L.P. Reports First Quarter Results,” Holly Energy Partners, L.P., May 1, 2018.)
At the end of the day, not all high-yield stocks are safe bets. But, as it stands, Holly Energy Partners, L.P.’s 8.8% payout could be an opportunity.