The recent market sell-off has hammered fuel distribution master limited partnership Sunoco (NYSE:SUN).
Editor’s Note: Hi, Robert Baillieul here. No credit card required. These moves will improve the company's financial flexibility, giving it more cushion to maintain its sky-high payout.
Which partly explains the 13% distribution yield. While Sunoco LP got a long-term take or pay contract from 7-Eleven in the deal, a new business direction and the same unitholder distribution means that this deal has to work out as expected or there could be problems for income investors. No credit card required. On the one hand, Sunoco generated enough cash to cover its high-yielding payout by a comfortable 1.32 times last year, which was within its target of over 1.2. A 12% yield feels like Bigfoot riding a unicorn on the believability index. The company recently reduced its 2020 growth spending budget by 42% to $75 million. Sunoco LP's business and ability to support its distribution (and that hefty yield) appear to be on more solid ground now that the 7-Eleven deal is complete. Check out our privacy policy. Sunoco has taken a number of actions to shore up its balance sheet, for starters. For starters, it has, and an elevated leverage ratio of 4.61 times debt-to-. As tempting as Sunoco's 20%+ yield might be, it doesn't appear to be sustainable due to the company's weaker financial profile. Let's conquer your financial goals together...faster. That's still really high, but there were a lot of moving parts in the quarter. https://www.incomeinvestors.com/wp-content/uploads/2018/09/Sunoco-LP-Stock-150x150.jpg. Sunoco LP's (NYSE:SUN) rapid expansion left the business mired in debt. The company recently reduced its 2020 growth spending budget by 42% to $75 million. Sunoco's distribution coverage is also a bit of a concern. One of the reasons for the gas station sale was that Sunoco LP was laboring under a heavy debt load. But over the past few years, management has quietly engineered an impressive turnaround. Management will have to thread a needle between distributions, debt payments, and asset sales. @themotleyfool #stocks $SUN, the sale of most of its owned gas stations to 7-Eleven, distribution coverage was below one for a long stretch, Sunoco LP (SUN) Q2 2020 Earnings Call Transcript, Why Energy Stocks Are Bouncing Back Today, Copyright, Trademark and Patent Information. SUN Dividend History & Description — Sunoco LP. Over the past 12 months, by comparison, Sunoco has cranked out $1.14 of distributable cash flow for every dollar paid in distributions. You can't forget the past here, even though it isn't a clear indicator of the future. Verdict: Sunoco is too risky to buy. Sunoco also noted that it has ample liquidity under its $1.5 billion revolving credit facility -- with only $162 million borrowed against it at the end of last year -- and no debt maturing until 2023. A key part of the partnership's growth plan includes acquisitions (it has already inked one deal), which will likely mean additional debt over the long-term. For example, the first quarter's coverage ratio was 1.0, not great but a notable improvement over not being able to cover the distribution. Sunoco LP doesn't appear to be a yield trap, but most investors would be better off avoiding the partnership until it proves the new business model can sustain such a large distribution over a much longer period of time. In fact, distribution coverage was below one for a long stretch, too, which is why the distribution hasn't increased since mid-2016. Sunoco believes it will have a better idea of volumes and margins when it reports its first-quarter results in May. With so much change taking place in 2018, it's probably best to err on the side of caution here and waiting for management to prove that it can actually hit those targets on a sustained basis. This isn't a great backstory for investors concerned about the safety of their income stream. For me, the big question right now is whether or not Sunoco LP is a yield trap... Today Sunoco LP is largely a distributor of gasoline, a business that the partnership projects will account for 70% of gross profit in 2018. Debt to EBITDA has also fallen to around 11 times. But that's the past, the new Sunoco LP is already looking a little different. Forward yield 5.05% Payable May 29; for shareholders of record May 19; ex-div May 15. The remaining 30% comes from leasing out owned gas stations, convenience store sales, and various services. @themotleyfool #stocks $SUN, Sunoco LP (SUN) Q2 2020 Earnings Call Transcript, Why Energy Stocks Are Bouncing Back Today, Why Refinery and Logistics Stocks Tumbled Today, Copyright, Trademark and Patent Information. He tries to invest in good souls.
Therefore, I would give this stock a second look.
That's because a large portion of its revenue comes from real estate leases on the gas stations it owns and take-or-pay fuel distribution and storage contracts where customers pay it a set fee even if they don't use the services it provides. It also slashed its maintenance capital budget by one third and planned to cut other operating costs. Meanwhile, even though the company's leverage ratio is within its 4.5 to 4.75 target range, it's on the high side for an MLP, since the sector typically targets leverage of less than 4.0. Sunoco LP is still making some portfolio adjustments, including the sale of more gas stations, but the big changes are largely complete. You can opt-out at anytime. The Ascent is The Motley Fool's new personal finance brand devoted to helping you live a richer life. These moves will improve the company's financial flexibility, giving it more cushion to maintain its sky-high payout. The deal leaves a more predictable business, too. Any investor who manages to scoop up one of these rare high yielders, however, can earn serious portfolio income. High dividend yields (usually over 10%) should be considered extremely risky, while low dividend yields (1% or less) are simply not very beneficial to long-term investors. Which is why Sunoco LP and its incredible 13% distribution yield caught my eye. But the current makeup of the partnership came about from the sale of most of its owned gas stations to 7-Eleven in January of 2018. Returns as of 11/05/2020. No part of this document may be used or reproduced in any manner or means, including print, electronic, mechanical, or by any information storage and retrieval system whatsoever, without written permission from the copyright holder.