Partners for business products(NYSE:EPD) is a popular income investment, and rightly so. The master limited partnership (MLP) has increased its distribution for 26 directly year. The midstream giant currently offers a 6.5% payout that is on an extremely sturdy one foundation.
Investors who like that big income stream should take a look at Fellow MLPDelek Logistic Partners(NYSE: DKL). It has also delivered very consistent distribution growth. Meanwhile, it currently offers an even higher yield of 10.8%.
Delek Logistics Partners is an MLP founded by refining companyDelek American holdings owning, operating and acquiring energy midstream infrastructure focused on crude oil. It operates crude oil, gas, water and refining logistics assets to support its parent and third-party customers. These activities generate predictable revenues, supported by long-term contracts with Delek, accounting for 36% of revenues EBITDAand external customers, accounting for 64%. It has a much smaller operation than Enterprise Products Partners, one of the largest, most diversified midstream energy companies.
The smaller MLP produces enough cash to cover its high-yield distribution. The coverage ratio was 1.1 in the third quarter, which was lower than the target of 1.3 due to the timing of the H2O Midstream acquisition, which closed late in the third quarter. Delek also received distributions from its recently closed investment in the Wink-to-Webster pipeline after the quarter ended. The company’s coverage ratio has averaged over 1.3 in recent years. That’s a comfortable level, although it is below Enterprise Products Partners’ higher coverage ratio of 1.7. The larger MLP holds more cash to help finance it big backlog in organic expansion projects.
Delek Logistics also has a decent balance sheet. Are leverage ratio was 4.15 at the end of the third quarter, a solid level for an MLP. Leverage has been on a downward trend in recent years; In 2022 it was almost 4.9 and at the end of the second quarter it had fallen to 3.8. Although Delek is financially solid, it is not an Enterprise Products Partner. The midstream giant has the strongest balance sheet in the industry, with a leverage ratio of 3.0 and the highest credit rating in the industry.
What sets Delek Logistics apart is its consistent distribution growth. The MLP has increased payments for 47 consecutive quarters. It last increased its payout by 0.9% in October and by 5.3% over the past year. That is a little faster than Enterprise Products Partners, which achieved 5% growth last year.
Delek Logistics has sufficient fuel to further expand distribution. Although the coverage ratio was tighter in the third quarter, this was almost entirely due to timing. As profits normalize, the coverage ratio should improve towards the target level.
Meanwhile, the driving factor behind the recent deterioration in financials was that the MLP has made several new investments to fuel future growth:
It bought Delek US’s stake in the Wink-to-Webster pipeline, an oil pipeline joint venture backed by ExxonMobil.
Acquired H2O Midstream for $160 million in cash. The positive investment will increase midstream capabilities in the Midland Basin.
The company made a final investment decision to build the Libby 2 gas processing plant in the Delaware Basin, which should come online in 2025 and boost cash flow the following year. It also recently approved a sour gas injection project in Libby that is expected to be completed by the middle of next year.
The MLP recently agreed to purchase Gravity Water Midstream for $285 million. The positive acquisition should close earlier next year and should complement H2O’s recent midstream purchase.
These investments will add meaningful incremental cash flow over the next two years. That should give the MLP the fuel to further expand its distribution.
Delek Logistics Partners has an excellent track record in increasing its high-yield distribution. That steady upward trend seems probably continuegiven all the growth it has achieved in recent months. While the MLP has a higher risk profile compared to Enterprise Products Partners offers a much higher return. It could be an attractive option for those looking for a higher octane income stream and who feel comfortable investing in boosting MLPs. Schedule K-1 federal tax form every year.
Consider the following before purchasing shares in Delek Logistics Partners:
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Matt DiLallo holds positions at Enterprise Products Partners. The Motley Fool recommends Delek Us and Enterprise Products Partners. The Motley Fool has a disclosure policy.
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