3 Reasons Not to Overindulge in This High Yielding Stock

A few weeks ago I wrote about the three important reasons why investors should consider buying the high-yielding units of Buckeye Partners (NYSE: BPL  ) . While I like Buckeye a lot, it's not my favorite income investment. Because of this, I want to take a closer look at the three reasons why investors shouldn't overindulge by allocating too much of their portfolio into the company's units.

Not always covered
Buckeye's distribution coverage ratio has been dangerously low the past few years, with the company paying out more than it earned last quarter, as well as in several quarters over the past few years. Because of this the company went five straight quarters without raising its distribution to investors.

A company that chronically pays out more than it earns is a warning sign of a distribution cut waiting to happen. For example, it was one of the signs that made Eagle Rock Energy Partners' (NASDAQ: EROC  ) distribution cut easy to spot. That said, Buckeye's distribution isn't in danger as it has been getting stronger, last quarter aside. While its distribution-coverage ratio isn't at the levels of Enterprise Product Partners (NYSE: EPD  ) and its 1.3 times coverage ratio, Buckeye has maintained a 1.02 coverage ratio this year. That's just inside the safe zone, which is why investors shouldn't overallocate when buying Buckeye.

A little too regional
Despite its international operations, Buckeye is still fairly regional in its focus, with a bulk of its assets in the Northeast and Midwest. It lacks the national footprint of its larger peers like Enterprise Product Partners.

Its deal to acquire Hess' (NYSE: HES  ) terminal network is a step in the right direction. That deal expands Buckeye's terminal network in the South and strengthens its network in the Northeast. Buckeye needs to continue to expand and to diversify its business before I would deem it safe enough to be a real core position in any portfolio.

Limited organic-growth opportunities
Buckeye isn't loaded with organic-growth opportunities. Other than the potential for storage-capacity expansions at its BORCO facility in the Bahamas and a few minor projects here and there within its current portfolio, Buckeye doesn't have much in the pipeline. In order to grow its distribution, Buckeye really has no choice but to seek out accretive acquisitions along the same lines as its terminal acquisition from Hess.

Enterprise Product Partners, on the other hand, has more than $7.5 billion in projects currently under construction. The company has very visible growth, which is something Buckeye just doesn't have. While organic growth isn't a deal breaker by any means, it would be nice to see the company be able to add more organic-growth opportunities in the future.

Investor takeaway
Buckeye Partners is a solid midstream company with a very tempting yield of more than 6%. While I like it in small doses, I wouldn't overallocate too much of any portfolio into the company as it's not as safe and it doesn't have the growth prospects of peers like Enterprise Product Partners. So, while I think Buckeye is a solid choice for income, its not the best of the best when it comes to income stocks.

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