Valero Energy Partners (NYSE: VLP) has treated income investors well over the course of its brief history as a public company. Since its IPO in late 2013, the master limited partnership (MLP) has increased its payout every single quarter, boosting it by an impressive 148% overall. However, there's plenty more growth where that came from given the company's strong financial profile and the opportunities it has in the pipeline.
An above-average income stream
Valero Energy Partners currently yields an attractive 5.1%, which is well above the 1.8% average for a stock in the S&P 500. The MLP supports that payout with very predictable cash flow backed by long-term, fee-based contracts. Furthermore, it only pays out about 63% of its cash flow, which is a healthy level for a high-yield stock. That equates to a distribution coverage ratio of 1.6, which is at the top end of its peer group range and well above the average of 1.3.
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Valero Energy Partners also boasts a strong balance sheet. The company's debt-to-EBITDA ratio stood at 3.4 at the end of the first quarter, which was slightly better than the 3.6 average of its peer group. Because of its stable cash flow, strong coverage level, and low leverage, Valero Energy Partners' payout is on rock-solid ground, and the company has the financial flexibility to continue expanding.
Just getting warmed up
Towards the end of last year, Valero Energy Partners spent $508 million to buy the Port Arthur terminal and Parkland Pipeline from its parent, refining giant Valero Energy (VLO +2.49%). That deal not only grew the company's asset footprint but positioned the partnership to increase its distribution by at least 20% in 2018.
Valero Energy Partners still has a long growth runway beyond that deal. That's because Valero Energy owns midstream assets that currently generate about $1 billion of annual EBITDA, which it could eventually drop down to its MLP. That's a significant inventory considering that Valero Energy Partners produced less than $400 million of EBITDA over the past 12 months.
Meanwhile, Valero Energy is investing in new midstream infrastructure that it could eventually drop down to its MLP, including those under construction in two joint ventures it formed with Magellan Midstream Partners (MMP +0.00%) last year. The first one will invest $380 million in building new refined products pipelines and storage assets in central Texas, which should start service by the middle of next year. Meanwhile, Valero and Magellan Midstream are also building a new marine terminal near Houston. Valero will pour $410 million into the terminal, which should start up in early 2020. Magellan sees the potential to invest another $700 million to double the terminal's size in the future, which is a project that it could partner with Valero.
In addition to the large inventory of assets Valero Energy Partners could acquire from its parent, the company has two more ways to grow cash flow in the future. First, while the MLP is currently investing a modest amount of capital to expand some of its existing assets, it could take on larger growth projects in the future. Meanwhile, Valero Energy Partners could also acquire additional assets from third parties like it did last year when it bought an interest in the Red River Pipeline from another MLP for $70 million. With a strong financial profile, Valero Energy Partners has the flexibility to continue growing its portfolio, and therefore its cash flow, at a healthy pace in the coming years.
A high-growth, high-yield stock for the long haul
While Valero Energy Partners has an impressive dividend history, what's even more compelling is what lies ahead. Because of the company's strong financial profile, its current high-yield payout is not only on rock-solid ground but likely headed much higher in the coming years. That income with upside could enable unitholders to generate attractive total returns, making Valero Energy Partners an enticing option for income-seeking investors to consider.
