3 Beaten-Up High-Yield Stocks: Are They Bargains or Value Traps?

Pipeline companies, for the most part, have significantly underperformed the market in recent years. Several factors have weighed on their valuations, including the lingering effects of the oil market downturn and the concern that rising interest rates will impact their ability to grow going forward. Among the hardest hit were Kinder Morgan (KMI -0.18%), Enbridge (ENB 0.40%), and EQT Midstream, which have all tumbled more than 20% over the past year.

As a result, this trio not only sells for much cheaper valuations, but their yields have risen sharply. While all three have some issues to address, their collective sell-off has them looking like bargains right now.

Instead of being traps, this three pipeline specialists seem like values ripe for the taking. Image source: Getty Images.

A fast-growing high yield for a much lower price

EQT Midstream's 20.5% decline in the past year doesn't make much sense. While there is some uncertainty because the company is in the midst of a reorganization with its gas-producing parent, they began that process to unlock the value of the franchise. That aside, the natural gas pipeline MLP has been firing on all cylinders, generating enough cash flow to grow its high-yield payout by 20% last year even as it covered it with cash by a comfortable 1.34 times. This combo of a big rise in the payout with an equally large drop in value has increased EQT Midstream's yield from around 4% to 6.9% in the past year. Meanwhile, the company's valuation has fallen to a compelling 11 times cash flow. 

For comparison's sake, fellow MLP Magellan Midstream Partners currently sells for 13.5 times cash flow. While Magellan is one of the strongest MLPs around, EQT Midstream beats it on almost every metric that matters:

Data source: EQT Midstream and Magellan Midstream Partners. EBITDA = earnings before interest, taxes, depreciation, and amortization.

With numbers like that, EQT Midstream should trade at a premium valuation, which is why I think this fast-growing MLP looks like a bargain these days.

A rock-bottom price

Natural gas pipeline giant Kinder Morgan has lost nearly 23% of its value in the past year, which pushed its yield from less than 2.5% to more than 3%. However, that current payout rate is a bit deceiving, as Kinder Morgan expects to boost the dividend 60% this year, which puts its forward yield closer to 5%. That's one of the many reasons why there's no logical reason for the pipeline stock's slide in the past year, especially since cash flow has been remarkably steady and is about to start growing again in 2018. As a result, the company's valuation has fallen to the point where the stock now trades at around eight times cash flow. The average pipeline stock sells for about 12 times cash flow.

It's hard to justify that discount since Kinder Morgan has worked hard to shore up its financial position in the past few years to free up cash so it could return more money to investors. In fact, the company plans on boosting the payout 60% this year, and at a 25% annual pace in 2019 and 2020. That said, even with the rapidly rising payout, Kinder Morgan is still generating enough cash to fully fund its growth projects with plenty left over to buy back some of its dirt-cheap shares.

Image source: Getty Images.

A bargain for income seekers

Canadian oil pipeline giant Enbridge has also tumbled about 23% over the past year. While Enbridge's cash flow did drop 10% on a per-share basis in 2017, that was because it issued a bunch of stock to finance expansion initiatives that drove its overall earnings up sharply. Furthermore, the company expects that to reverse this year, with it anticipating a 15% improvement in cash flow per share. However, as a result of the sell-off, Enbridge's stock trades at around 11 times cash flow, which is below the peer group average.

Another effect of the sell-off is that the oil pipeline company's dividend yield has risen from around 4% to well over 6% because Enbridge also increased its payout by double digits this year. That pace should continue through at least 2020 given the company's current forecast. This combination of a fast-growing income stream for a relatively cheap price makes Enbridge look like an excellent bargain these days.

Tossed in the bargain bin

For whatever reason, the market has steadily marked down the valuations of these pipeline companies over the past year. Investors can now scoop them up for bargain prices, which allows them to collect a high yield that should grow at a high rate over the next few years. That's an ideal combination for income-seeking investors.