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This Small Cap MLP Has a Secure 10 Percent Yield

This Small Cap MLP Has a Secure 10 Percent Yield
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Monday, 20 August 2018 05:23 PM Current | Bio | Archive

Master Limited Partnerships, or MLPs for short, have obvious appeal for income investors. MLPs typically offer high distribution payouts. It is not uncommon for MLPs to yield 5% or more. In some cases, MLPs have yields above 10%.

But rather than focus solely on yield, investors should make sure the distribution is sustainable. Sky-high yields can sometimes be a sign of deteriorating fundamentals, as a falling unit price will result in rising yields. The major risk when investing in MLPs is a distribution cut.

Suburban Propane Partners (SPH) is a small-cap MLP with a 10% distribution yield. And, the company generates more than enough cash flow to grow the business, and reward shareholders with a secure (and growing) distribution payout.

Weathering Difficult Climates

Suburban Propane Partners distributes propane and related services and accessories, to both residential and business customers. It operates in the utility sector, with a wide range of services. It is also a marketer of fuel oil, natural gas, and electricity.

As a utility, Suburban Propane generates steady cash flow. It incurs some volatility from year to year, based largely on weather patterns. Last year was a difficult one for the company, as warmer-than-usual temperatures throughout the U.S. negatively impacted demand for propane. However, temperatures have normalized throughout 2018, which has led to stronger results for the company.

Suburban Propane’s recent quarterly earnings report showed 8% revenue growth, thanks to higher selling volumes for propane as well as higher sales prices. Propane gallons sold increased 4% for the quarter quarter. Temperatures have cooled down so far this year across Suburban Propane’s operating regions, which led to 17% adjusted EBITDA growth over the first three fiscal quarters of 2018.

The company benefits from a stable business model. Consumers will always need to heat their homes and cook their food, which provides a certain level of demand for Suburban Propane’s products and services, even if the economy enters a recession. It can also gradually increase its customer account, through population growth and bolt-on acquisitions. Continued growth will help secure Suburban Propane’s hefty distributions.

Fueling Steady Growth & Distributions

Suburban Propane is not likely to qualify as a growth company to be sure, but it can still generate enough growth to fuel its hefty distribution. Reasonable expectations could be for 3%-4% annual EBITDA growth, around the rate of GDP growth. This will provide the company the ability to gradually increase the distribution over time.

Investors should note that Suburban Propane cut its distribution by 32% in October 2017. This was due to a period of two consecutive record warm winters in the U.S., and a corresponding reduction in demand for propane. While distribution cuts are never a good thing, the one positive takeaway is that Suburban Propane’s revised distribution level is much more sustainable. In the past 12 months through the fiscal third quarter, Suburban Propane had a distribution coverage ratio of 1.3x, which means the company generated 30% more cash flow than it needed to pay its distribution for the past year.

The distribution cut also improved the company’s balance sheet. Suburban Propane has a net-debt-to-adjusted-EBITDA ratio of 4.35x, and the company has a target range of 4.0x. The combination of a healthier balance sheet, stronger distribution coverage, and steady growth should secure Suburban Propane’s 10% distribution.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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BenReynolds
Master Limited Partnerships, or MLPs for short, have obvious appeal for income investors. MLPs typically offer high distribution payouts. It is not uncommon for MLPs to yield 5% or more. In some cases, MLPs have yields above 10%.
small, cap, mlp, yield
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2018-23-20
Monday, 20 August 2018 05:23 PM
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