Can a Double-Digit Yield Possibly Be Safe?
Most people have never heard of Martin Midstream Partners L.P. (NASDAQ:MMLP), but it offers one of the highest payouts in the current stock market.
Headquartered in Kilgore, Texas, Martin Midstream Partners is a master limited partnership (MLP) that operates primarily in the U.S. Gulf Coast region. The partnership provides a wide range of services, such as natural gas liquids transportation and distribution, petroleum products terminaling and storage, sulfur processing, and marine transportation—just to name a few.
Paying quarterly distributions of $0.50 per unit, MMLP stock offers investors a jaw-dropping annual yield of 13.7%.
The big question, of course, is whether the payout is safe. So let’s take a look.
In the MLP business, a key performance metric is distributable cash flow. This is because, in order for a partnership to maintain its distribution rates, it has to generate enough cash to cover its payout.
The good news is, MMLP stock’s distributions are more than solid. Last year, Martin Midstream Partners generated $91.1 million in distributable cash flow, while its actual cash payments totaled $76.9 million. That translated to a solid distribution coverage ratio of 1.18 times. (Source: “Martin Midstream Partners Reports 2017 Fourth Quarter Financial Results,” Martin Midstream Partners L.P., February 14, 2018.)
In the first quarter of this year, things were equally impressive. Martin Midstream Partners generated $26.7 million in distributable cash flow while paying out $19.6 million in total distributions. That comes out to a distribution coverage ratio of 1.36 times, providing an even wider margin of safety than before. (Source: “Martin Midstream Partners Reports 2018 First Quarter Financial Results,” Martin Midstream Partners L.P., April 25, 2018.)
Stable Business Model
Still, if you are familiar with the partnership’s operations, its solid distribution coverage shouldn’t come as a surprise.
Sure, Martin Midstream Partners operates in the energy industry, and oil prices have yet to make a full recovery. However, the partnership does not drill any new wells. Instead, it earns a fee by providing natural gas services, sulfur services, petroleum products terminaling and storage, and marine transportation services.
For instance, in the partnership’s natural gas storage segment, the business is backed by fee-based, multi-year contracts with a weighted average contract life of approximately three years.
In the terminaling and storage segment, the business is backed by fee-based contracts for traditional storage assets, while its fee-based, long-term tolling agreement for Smackover Refinery comes with a guaranteed minimum volume.
What this means is that the partnership can generate stable cash flows despite volatility in commodity prices. In the latest investor presentation, MMLP’s management said that they expect fee-based operations to account for approximately 61% of the partnership’s adjusted earnings before interest, tax, depreciation, and amortization in full-year 2018. (Source: “2018 MLPA MLP & Energy Infrastructure Conference,” Martin Midstream Partners L.P., May 23, 2018.)
With a stable business model and solid distribution coverage, Martin Midstream Partners’ 13.7% yield is worth a serious look.