This Dividend Could be in Trouble in 2014 for Three Reasons

Buckeye Partners (NYSE: BPL  ) pays a really solid distribution of more than 6%. While that's a great payout, its ability to grow that payout is what will make the company's units a long-term winner. Here are the three areas that could crimp that growth in 2014.

Distribution coverage ratio
Buckeye's quarterly distributions had been stuck at the same level for five straight quarters before it restarted distribution growth this past May. The more than a year of static payouts broke a streak of more than 30 consecutive quarterly distribution increases. The issue that halted growth was the fact that the company's distribution coverage ratio was dangerously low.

In 2011 the ratio dipped below one, meaning the company paid out more money than it made. That trend came back last quarter after its coverage ratio fell to 0.84 times. This past quarter, the coverage ratio was affected by the conversion of 8.5 million Class B units as well as an increase in maintenance capital expenses. That was more of a short-term issue.

But some of its larger peers like Enterprise Products Partners (NYSE: EPD  )  maintain an average coverage ratio of above 1.3 times. That's given Enterprise the freedom to raise its payout as well as retain a large portion of its cash flow to fund its growth projects.

Buckeye doesn't quite have Enterprise Product Partners' $7.5 billion pipeline of organic growth projects so it doesn't need to retain so much cash. But a higher coverage ratio would be a welcome sight for investors. So, while a distribution cut doesn't appear to be in the cards, the company does have its work cut out to put its distribution-coverage ratio on a safer level.

The balance sheet
Buckeye has a fair amount of debt. The company's current long-term debt to EBITDA ratio is 4.2 times. While that's much lower than last year's 4.7 times, it's not on the same level as a top-credit-rated peer like Enterprise Product Partners. Over the past 12months, Enterprise's debt to adjusted EBITDA ratio is just 3.6 times. Even though Buckeye's debt ratios have been heading in the right direction, it is still important for investors to keep an eye on the balance sheet and make sure the company doesn't unwisely lever up to make an acquisition.

The company did just make a big deal as it spent $850 million to buy 20 storage terminals from Hess (NYSE: HES  ) . The company added $800 million in debt to help fund that deal. While the Hess deal is accretive to its distributable cash flow, Buckeye Partners still does need to keep an eye on its debt levels, especially if it makes another deal early in 2014.

Future expansion projects
Buckeye spends a few hundred million dollars on expansion projects each year. In the past, these have included storage tank expansions at its BORCO facility in the Bahamas, several projects in the Midwest to take advantage of America's energy boom, and projects at its New York Harbor-located Perth Amboy Facility.

Looking beyond these projects, Buckeye doesn't have a lot of major organic opportunities in the pipeline. It has some specific opportunities in the Utica Shale as well plans to further develop Perth Amboy, and it's likely to spend some money on its soon to be acquired terminal assets from Hess.

What it doesn't have is a robust organic-growth pipeline like Enterprise Products Partners. What's pretty stunning is Enterprise's more than $7.5 billion worth of projects under construction isn't much smaller than Buckeye Partners entire $8 billion market cap. Because Buckeye doesn't have as much organic growth, the only way it will be able to grow its distribution in the future is by finding similar acquisitions as the recently completed Hess terminal package acquisition. Further, it needs to not overpay for that growth or it won't be able to raise its payout.

Investor takeaway
Buckeye's ability to grow its payout to investors will continue to happen as long as it maintains a stable payout ratio and has the flexibility to grow its business. To do that it needs to have a flexible balance sheet to fund new acquisition opportunities as these arise. Bottom line: Buckeye isn't as strong as it could be though it's still a solid income stock.

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