Delek Logistics Partners (NYSE: DKL), nestled in Tennessee, operates as a master limited partnership (MLP) and manages a sprawling 850 miles of oil pipelines along with an assortment of other energy assets.
February saw the company shell out its latest distribution, a hefty $1.105 per share. When you annualize that, you get a remarkable yield of 10.2%. But the real question on investors’ minds is: can this generous yield be sustained?
Reflecting back on last year, Delek reported a distributable cash flow (DCF) of $256 million, ticking up slightly from $248 million the previous year. Looking ahead, expectations for this year project a marginal rise in DCF to $263 million.
In 2024, Delek distributed $205 million to its partners, resulting in an 80% payout ratio. Projections for this year suggest a slight increase in that figure to 81%.
Now, if Delek operated as a typical corporation, an 80% payout ratio might raise a few eyebrows. Generally, I find comfort in payout ratios settled at or below 75%. But MLPs play by a different set of rules. They are mandated to distribute 90% or more of their earnings. While earnings aren’t synonymous with DCF, this requirement often leads MLPs to dispense a larger share of their DCF, resulting in higher payout ratios compared to other businesses.
For MLPs like Delek, I find a payout ratio as high as 100% to be acceptable. Thus, their standing at 80% or 81% doesn’t ring any alarm bells for me.
Delek has consistently increased its distribution every quarter since it started doling them out in 2012, and that’s no small feat.
This consistent track record merits a bonus point in their ratings, effectively balancing any potential downside were Delek to underperform against their DCF predictions or face negative growth.
While a drop in DCF is something to monitor closely, Delek’s robust payout ratio and stellar history of hiking distributions signals that, barring any significant downturns, this impressive double-digit yield appears to be secure.
Dividend Safety Rating: A
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