Wednesday, March 19, 2025

A Growing Energy Play With a 10% Yield

Shield

AN OXFORD CLUB PUBLICATION

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Plus - just like today's Safety Net stock - it's in the energy sector, which has been one of the top performers so far this year.

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Delek Logistics Partners: A Growing Energy Play With a 10% Yield

Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Marc Lichtenfeld

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%.

Chart: Delek's Cash Flow Looks Solid
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All using a strategy that has produced an 81% win-rate over the past year.

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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.

So far, the partnership's 10.2% yield is looking quite strong. Can it earn Safety Net's first "A" grade of 2025?

Click Here to Find Out
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