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Published Thu, 07 Dec 2017 16:07:28 on Income Investors
If You Are Looking for a Safe Double-Digit Yielder, Read This
In the current stock market, a double-digit yield often turns out to be a sign of trouble. And that’s why today’s top dividend stock is special. The company not only offers a staggering 10% dividend yield, it has a rock-solid business to back its payout.
Let me explain. The stock in question is Crestwood Equity Partners LP (NYSE: CEQP), a master limited partnership (MLP) headquartered in Houston, Texas.
Crestwood is in the midstream energy business. It owns and operates midstream assets located in several major energy production areas in the country, including the Marcellus Shale, Bakken Shale, Delaware Permian Basin, PRB Niobrara Shale, Barnett Shale, and Fayetteville Shale. Right now, the partnership has three main segments: “Gathering & Processing,” “Storage & Transportation,” and “Marketing, Supply & Logistics.”
In other words, Crestwood does not have any exploration or production activity. For natural gas, the partnership provides gathering, processing, treating, compression, storage, and transportation services. For natural gas liquids (NGLs), it provides storage, transportation, terminalling, and marketing services.For crude oil, Crestwood also engages in the gathering, storage, terminalling, and marketing.
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The key to note here is that Crestwood’s business is supported by fixed-fee contracts. Management estimated that, for 2017, approximately 85% of the partnership’s earnings before interest, tax, depreciation and amortization (EBITDA) will come from take-or-pay and fixed-fee contracts. Variable rate contracts, on the other hand, only account for 15% of Crestwood’s EBTIDA. (Source: “Investor Presentation,” Crestwood Equity Partners LP, last accessed December 6, 2017.)
Moreover, the partnership has a top-tier customer base. In the Gathering & Processing segment, Crestwood serves many well-known producers, such as Royal Dutch Shell plc (NYSE: RDS.A) and Chesapeake Energy Corporation (NYSE: CHK). In the NGL Marketing, Supply and Logistics business, the partnership’s high-profile customer base includes names like Exxon Mobil Corporation (NYSE: XOM), Williams Companies Inc (NYSE: WMB), and Total SA (NYSE: TOT).
By having a long-term contract profile with high-quality customers, Crestwood not only protects itself from commodity price volatility, but also minimizes volume risk associated with the midstream business. Therefore, the partnership is well positioned to generate stable cash flows through thick and thin.
Crestwood’s stable cash flows translate to oversized dividends. The partnership currently pays quarterly distributions of $2.40 per unit, giving CEQP stock an annual yield of 10%.
The payout is well covered too. In the third quarter of 2017, Crestwood generated $50.3 million in distributable cash flow, which resulted in a distribution coverage ratio of approximately 1.2 times, providing safety. (Source: “Crestwood Announces Third Quarter 2017 Financial and Operating Results And Agreement to Sell US Salt, LLC For $225 Million,” Crestwood Equity Partners LP, October 31, 2017.)
When Crestwood reported its third-quarter earnings, management also announced an agreement to sell US Salt LLC, a non-core business in its portfolio, for $225.0 million. Proceeds from this divestiture would allow the partnership to pursue its 2017 and 2018 capital expansion programs without accessing the equity capital markets. Management expects the partnership to resume cash flow per unit growth in 2018.
Right now, Crestwood has a long-term target distribution coverage ratio of 1.2 to 1.3 times. Combined with its stable business model and generous distribution policy, CEQP stock is worth checking out for yield-seeking investors.
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|Stock name||Last trade||P/E||Earnings/Share||Dividend/Share||Dividend yield|
|CRESTWOOD EQUITY PARTNERS||36.99||13.5||2.74||2.40||6.47|
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