Above Average MLPs for High Income Investing

When a stock offers an exceptionally high dividend yield, it usually signals that a dividend cut may be just around the corner. Therefore, investors should not purchase high-yield stocks without making sure that the dividend is safe. With that said, not all the high-yield stocks offer dividends on the brink of being cut.

In this article, we will discuss the prospects of three high-yield MLPs, or master limited partnerships, which offer above-average distribution yields with a wide margin of safety.

1. Plains All American (PAA)

Plains All American Pipeline, L.P. PAA is a midstream energy infrastructure provider. The company owns an extensive network of pipeline transportation, terminalling, storage and gathering assets in key crude oil and natural gas liquids (NGL) producing basins at major market hubs in the United States and Canada. On average, it handles more than 7 million barrels per day of crude oil and NGL through 18,370 miles of active pipelines and gathering systems. Plains All American generates around $40 billion in annual revenues and is based in Houston, Texas.

On August 2, 2024, Plains All American reported its Q2 results for the period ending June 30, 2024. For the quarter, revenues came in at $12.9 billion, up 11.5% compared to last year. Adjusted EBITDA from crude oil increased by 9% year-over-year, primarily due to higher tariff volumes on our pipelines, tariff escalations and contributions from acquisitions. These items were partially offset by fewer market-based opportunities.

Adjusted EBITDA from NGL increased 52% year-over-year results primarily due to turnarounds impacting sales volumes last year and incremental margins from iso-to-normal butane spread benefits this time around. Thus, adjusted EBITDA totaled $467 million for the quarter, up 15% compared to Q2 2023. Distributable cash flows (DCF) rose by five cents to $0.58 on a per-unit basis. Management raised the partnership’s full-year 2024 guidance, expecting adjusted EBITDA to be between $2.725 and $2.775

Plains All American has a number of minimum volume commitment contracts that support relatively stable revenues in its pipelines (transportation) segment. These contracts have an average remaining term of around five years.

PAA anticipates targeting annualized common distribution increases of approximately $0.15 per unit each year until reaching a targeted unit distribution coverage ratio of approximately 160%. PAA’s payout ratio is currently sitting at relatively comfortable levels of 65%. PAA stock currently yields 6.4%.

2. Sunoco LP (SUN)

Sunoco SUN is a master limited partnership that distributes a range of fuel products through its wholesale and retail business units. The wholesale unit purchases fuel products from refiners and sells those products to both its own and independently owned dealers. Sunoco was founded in 2012 and is headquartered in Dallas, Texas. 

Sunoco reported its second quarter earnings results on August 7, 2024. The company reported that its revenues totaled $6.2 billion during the quarter, which was 7% more than the revenues that Sunoco generated during the previous year’s quarter. 

This was a better year-over-year performance compared to the previous quarter. Fuel prices are mostly a flow through item for Sunoco, since Sunoco’s costs increase as well when fuel prices rise. Revenue changes thus do not necessarily impact profits to a large degree, although margins vary from quarter to quarter. Sunoco reported that its adjusted EBITDA was up 28% year over year, improving to $320 million during the quarter.

Sunoco’s distributable cash flows totaled $295 million during the quarter, which was higher compared to the previous year’s quarter, and which equated to DCF of $2.19 per share, which covered the dividend easily. For 2024, Sunoco is forecasting EBITDA of $1.46 billion to $1.52 billion to account for the acquisition of NuStar Energy.

The company profits from significant scale and revenue consistency. In Texas, Sunoco is one of the largest independent fuel distributors, and Sunoco is also among the top distributors of Chevron, Exxon and Valero branded motor fuel in the rest of the United States. In the fuel wholesale industry, scale is important, as increased scale allows for higher margins and a better negotiating position with suppliers.

Sunoco’s dividend payout ratio has moved in a wide range throughout its existence, as its cash flow has seen steep ups and downs. The company has never cut its dividend, but dividend increases have been difficult to come by. The current yield of around 6.6% provides more than ample income. Sunoco has covered its dividend payout by a factor of 1.9 via distributable cash flows during the last four quarters, thus the dividend looks sustainable.

3. Enterprise Products Partners (EPD)

Enterprise Products Partners EPD is a midstream MLP, with a vast network of pipelines and storage tanks. The difference is that Enterprise Products Partners is focused primarily on natural gas. Its network includes nearly 50,000 miles of pipelines of natural gas, natural gas liquids, crude oil and refined products. It also has storage capacity of more than 250 million barrels.

Enterprise Products Partners has a very similar business model with that of Magellan and MPLX. It charges fees that are proportional to the volumes transported and stored throughout its network and has minimum-volume requirements in order to receive reliable cash flows even under the most adverse business conditions. The merits of this business model were in full display in 2020, when the MLP posted a benign 15% in its distributable cash flow per unit.

Enterprise Products Partners L.P. reported its Q4 2023 financial results on February 1, 2024, showcasing a strong performance that exceeded analysts' expectations. The company announced adjusted earnings per limited partner unit of 72 cents, showing an increase from the previous year's 65 cents.

This achievement was driven by robust operating margins from EPD's fee-based businesses and improved margins in its propylene and octane enhancement businesses. During the quarter, Enterprise Products Partners experienced a significant increase in pipeline volumes across NGL, crude oil, refined products and petrochemicals, totaling 7.8 million barrels per day (BPD), up from 6.9 million BPD in the same quarter of the previous year.

Natural gas pipeline volumes also saw an uptick, amounting to 18.7 trillion British thermal units per day (TBtus/d), compared to 17.6 TBtus/d in the prior year.

Enterprise Products Partners has raised its distribution for 26 consecutive years and is currently offering a 7.5% distribution yield. It also has a solid payout ratio of 57% and one of the strongest balance sheets in the MLP universe, with a BBB+ credit rating from S&P and a Baa1 rating from Moody’s. Thanks to its solid payout ratio, its financial strength and its defensive business model, the MLP is likely to continue raising its distribution for many more years.

At the time of publication, Ciura had no positions in any securities mentioned.