This year has been an abysmal one for dividends in the oil patch. Many payouts have fallen along with crude prices. Meanwhile, some of the sector’s strongest companies have only maintained their current level instead of delivering on their growth promises.
That makes Delek Logistics Partners (NYSE: DKL) stand out, since it’s one of the few energy companies that has continued growing its dividend this year. The MLP recently declared its 29th consecutive quarterly increase, pushing its already-impressive yield further past 12%. That likely won’t be its last one as the company’s improving financials and visible growth prospects give it more room to increase its payout.
A double-digit yield backed by surprisingly solid financial metrics
When a dividend yield rises above 10%, that’s usually a sign from the market that it doesn’t believe in the payout’s sustainability. However, when it comes to Delek Logistics’ dividend, those fears seem unfounded.
For starters, the company generates very stable cash flow backed by long-term, fee-based contracts that include minimum volume commitments. Those agreements put a solid floor under its cash flow at about 70% to 75% of its projected annual earnings this year. That helps insulate it against fluctuations in energy prices and volumes, which has been the case in 2020.
Meanwhile, Delek Logistics expects to end this year with a conservative dividend payout ratio between 67% to 71% of its cash flow (i.e., below its minimum baseline level). That gives it a nice cushion and allows it to retain some cash to finance expansion.
Finally, the company has a solid balance sheet. It ended the first quarter with a debt-to-EBITDA ratio of 4.1, which is right around its 4.0 target. Meanwhile, it expects leverage to be below that goal by year’s end as it continues growing its earnings.
Plenty of fuel in the tank
While Delek Logistics’ solid financial metrics support its current payout level, three catalysts provide the fuel to keep growing it this year:
- At the end of March, the company agreed to acquire the Big Spring gathering system in the Permian Basin from its parent Delek US Holdings (NYSE: DK). It paid $100 million in cash and 5 million of its common units (valued at $45.5 million at the time) for assets that should generate $30 million to $32 million in annual EBITDA.
- In May, it bought some trucking assets from Delek US Holdings for $48 million in cash. These assets should generate $8 million to $9 million of annualized EBITDA.
- The company and its partner, Plains All American Pipeline (NYSE: PAA), are finishing a $16 million expansion of their Red River joint venture. Once complete in the second half of this year, the project will grow Red River’s EBITDA from an annualized range of $13.5 million-$15.5 million to $20 million-$25 million.
The incremental cash flow from these three growth drivers will improve Delek Logistics’ payout ratio from 1.15 in the first quarter to between 1.4 to 1.5 by year-end. Further, they’ll push down its leverage ratio from 4.1 to below 4.0.
That will give Delek Logistics even more financial flexibility to continue making growth-focused investments. Those future investments could include further dropdowns from Delek US Holdings, third-party transactions, or additional organic expansions.
That combination of financial strength and visible growth gives Delek Logistics the confidence to continue increasing its payout. It currently expects to grow its dividend by 5% this year compared to 2019’s level. With increases of 0.6% and 1.1% already in the books this year, the company remains on track to deliver incremental raises in the third and fourth quarters.
A compelling option for yield-seekers
Delek Logistics Partners continues to swim against the current in the energy sector by increasing its payout when most others are reducing theirs. It can afford to keep pushing its payout higher thanks to its improving financial profile and growth catalysts. Because of that, it looks like an intriguing option for income investors these days.
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