1 High-Yield Stock to Think About
Generally speaking, high-yield stocks are not the safest bets. But for those who are willing to do the research, it’s still possible to find safe and rising income plays that also offer oversized payouts today.
EQM Midstream Partners LP (NYSE:EQM) is a good example of this. As a master limited partnership (MLP) headquartered in Pittsburgh, Pennsylvania, EQM doesn’t really make headlines in the financial media. But the stock deserves income investors’ attention due to the sheer size of its payout.
EQM was created by EQT Corporation (NYSE:EQT) to own, operate, acquire, and develop midstream assets in the Appalachian Basin. Through its natural gas transmission, storage, and gathering systems, the partnership provides midstream services to EQT Corporation, as well as to third-party customers.
Today, the No. 1 reason to consider EQM Midstream Partners LP is to collect its oversized payout. The partnership has a quarterly distribution rate of $0.115 per unit, which comes out to an annual yield of 10.1%.
EQM Midstream Partners LP: Is the Distribution Safe?
And if you are concerned about this ultra-high yielder’s distribution safety, don’t worry; based on the partnership’s latest financial results, the payout remained safe.
Like most master limited partnerships, EQM reports something called “distributable cash flow.” By comparing this figure to the partnership’s actual distributions, we can see whether it generated enough cash to cover the payout.
In the third quarter of 2018, EQM Midstream Partners generated $218.6 million in distributable cash flow. Since the partnership declared total cash distributions of $207.7 million for the quarter, it achieved a distribution coverage ratio of 1.05 times. (Source: “CORRECTING and REPLACING Q3 2018 Results Announced For EQM Midstream Partners And EQGP Holdings,” EQM Midstream Partners LP, October 25, 2018.)
Over the past four quarters, EQM’s distribution coverage ratio came out to 1.2 times. So the partnership had no problem meeting its distribution obligations.
The main reason why EQM can maintain its distribution safety, especially in a volatile commodity price environment, is its fee-based business model. In the most recent quarter, the partnership earned 93% of its transmission and storage revenue from firm reservation fees. In EQM’s natural gas gathering operations, firm reservation fees accounted for 45% of the segment’s total revenue. (Source: “Investor Relations Presentation,” EQM Midstream Partners LP, last accessed December 19, 2018.)
It also helps that the business is backed by long-term contracts. As of September 30, 2018, EQM’s transmission and storage segment had a weighted average contract life of 15 years, while its gathering operations had a weighted average contract life of eight years.
By operating through long-term, fee-based contracts, EQM Midstream Partners can generate a predictable stream of cash flow, which in turn can be used to fund its generous distributions.
219% Distribution Growth Since IPO
The best part is that the payout has only been going up. EQM Midstream Partners completed its initial public offering (IPO) in June 2012 and paid its first distribution—a cash payment of $0.35 per unit—in November of that year. Since 2013, the partnership has raised its payout every single quarter. (Source: “Distribution History,” EQM Midstream Partners LP, last accessed December 19, 2018.)
That’s right. While most companies would be proud to be able to raise their dividend every year, EQM managed to give its investors a pay raise every three months.
The latest distribution hike, which was announced on October 23, represented a two-percent increase sequentially and a 14% increase year-over-year. Since its IPO, EQM Midstream Partners’ per unit quarterly distribution rate has increased by a staggering 218.6%.
Not a Hot Ticker at the Moment, But Distributions Still on the Rise
Now, I want to point out that other than those continuous distribution hikes, another factor behind EQM’s ultra-high yield was the downturn in its unit price. Over the past six months, EQM stock tumbled more than 19%.
What’s the reason behind this pullback?
Well, most recently, investors weren’t thrilled about the upcoming simplification transaction, which was announced on November 30. (Source: “Equitrans Midstream to Acquire 100% Ownership of EQGP through Negotiated Purchases and Limited Call Right,” EQM Midstream Partners LP, November 30, 2018.)
I won’t go into the details here, but based on management’s guidance, the situation for EQM stock investors may not be as bad as its recent unit price movement suggests.
In particular, management made it clear that the proposed transaction would not lead to a distribution cut at EQM. And the partnership is targeting an annual distribution growth rate of between six and eight percent starting in 2019.
Furthermore, management is confident about maintaining a margin of safety in the payout. They expect EQM’s distributable cash flow to be sufficient to cover its distributions in 2019, and that the partnership’s distribution coverage ratio would improve to above 1.2 times starting in 2020.
With a safe 10.1% yield that’s still growing, EQM stock should be near the top of every income investor’s watchlist.