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A Reduced Payout Could Be Imminent for These High-Yield Dividend Stocks

By Matthew DiLallo - Apr 21, 2019 at 2:03PM

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These ultra-high-yield stocks aren’t sustainable.

Dividend yields tend to rise as investors get nervous about the payout's long-term sustainability. When they reach double digits, it's usually a warning sign that a reduction could be ahead. That certainly seems to be the case for ultra-high-yielding energy companies BP Prudhoe Bay Royalty Trust (BPT -6.27%), Martin Midstream Partners (MMLP -1.26%), and Andeavor Logistics (ANDX).

Running out of fuel

Over the past year, BP Prudhoe Bay has paid out $5.07 per share in dividends to its investors. That implies a monster 19% yield if the royalty trust can keep it up. The problem, however, is that unlike many dividend stocks, BP Prudhoe Bay doesn't pay a fixed amount. Instead, its payout fluctuates with oil prices and production from the Prudhoe Bay field in Alaska.

Scissors cutting into a $100 bill.

Image source: Getty Images.

Oil prices have been excruciatingly volatile in recent months. They crashed 40% over the final three months of 2018. Because of that, BP Prudhoe Bay is only paying out $0.33 per share for its fourth-quarter dividend. While that payout could rise in the first quarter -- fueled by crude's best quarter in a decade -- output from the Prudhoe Bay field is depleting. According to the Trust's latest annual report, "it is estimated that royalty payments to the Trust will continue through the year 2022, and would be zero in the following year." Though that's an improvement from 2017's report when the Trust thought payments would end this year, it's clear this payout is in decline and will eventually end.

Dangerous ground

Martin Midstream Partners currently yields an eye-popping 16%. That income stream, however, doesn't seem sustainable. For starters, the master limited partnership (MLP) distributed 31% more money than it hauled in last year. That was well below the MLP's forecast that it would produce 25% more cash than it paid out. The culprit were lower oil prices, which impacted its operations. The rough patch wouldn't have been such a problem if the company didn't have an elevated leverage ratio of 4.61 times at the end of last year. That's well above the sub-4.0 times comfort zone of most MLPs.

The company has been working on several initiatives to boost coverage and reduce leverage. It recently acquired Martin Transport, which will increase cash flow. Meanwhile, it's in the process of selling its Cardinal Gas business to bolster its balance sheet. While these moves will help, the more prudent one would be to significantly reduce its distribution and use that excess cash to pay down debt. At some point, Martin Midstream will need to be realistic and reduce its payout. That's why I don't think income-seeking investors should touch this MLP.

Awaiting a merger that makes sense

Last year, refining giant Marathon Petroleum (MPC -2.07%) acquired Andeavor Logistics' parent. As a result, it now controls the MLP. That creates some redundancy since Marathon already has an MLP: MPLX (MPLX -1.45%).

Marathon is currently working on getting a better grasp of Andeavor Logistics' business before it decides its next steps. In the meantime, it stopped growing Andeavor Logistics' high-yielding distribution to help improve the MLP's coverage and leverage levels. Investors, though, believe that Marathon will eventually merge Andeavor Logistics with MPLX. That will likely result in a lower payout for current Andeavor Logistics investors than the 12%-yielding distribution they're now collecting. The combination, however, makes a lot of sense because it would create one larger-scale entity with a stronger financial profile. That's why it seems likely that a payout reduction is on the way.

Not worth the risk

A big-time dividend cut seems like a foregone conclusion for each one of these sky-high yields. That's why investors should avoid their allure. A better option to consider buying instead is MPLX, which offers an attractive 8% payout that's on rock-solid ground.


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Stocks Mentioned

BP Prudhoe Bay Royalty Trust Stock Quote
BP Prudhoe Bay Royalty Trust
$15.24 (-6.27%) $-1.02
Marathon Petroleum Corporation Stock Quote
Marathon Petroleum Corporation
$95.53 (-2.07%) $-2.02
MPLX LP Stock Quote
$30.84 (-1.45%) $0.45
Martin Midstream Partners L.P. Stock Quote
Martin Midstream Partners L.P.
$4.30 (-1.26%) $0.06
Andeavor Logistics LP Stock Quote
Andeavor Logistics LP

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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