Delek Logistics Partners (NYSE: DKL) is a Tennessee-based master limited partnership with 850 miles of oil pipelines and other energy-related assets.
Its most recent distribution (partnerships’ dividends are called distributions) in February was $1.105 per share. Annualized, that comes out to an impressive 10.2% yield. Can investors rely on that sky-high yield going forward?
Last year, Delek’s distributable cash flow, or DCF, was $256 million, up slightly from $248 million the year before. This year, DCF is forecast to be $263 million – another small increase.
In 2024, the partnership paid out $205 million in distributions for an 80% payout ratio. This year, the payout ratio is forecast to inch higher to 81%.
If this were a normal corporation, an 80% payout ratio would be a problem. In most cases, I like to see payout ratios of 75% or lower. However, master limited partnerships are different. They are required by law to pay out 90% or more of their profits in distributions. Profits are not the same as DCF, but the 90% requirement means that MLPs often end up paying out a significant portion of their DCF. As a result, their payout ratios are typically higher than other companies’.
When it comes to MLPs, I’m comfortable with payout ratios as high as 100%. So Delek’s 80% or 81% payout ratio is perfectly fine.
The company has raised its distribution every quarter since it began paying one in 2012. That’s impressive.
That also gives Delek’s grade a one-point bonus, which would offset any penalty the company would receive if it missed DCF estimates next year and turned in a negative growth number.
Falling DCF is something we’d certainly keep an eye on, but with Delek’s comfortable payout ratio and terrific track record of raising its distribution, unless the business goes off the rails for a couple of years, this double-digit yield is safe.
Dividend Safety Rating: A
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