Please ensure Javascript is enabled for purposes of website accessibility

3 High-Yield Stocks at Rock-Bottom Prices

By Matthew DiLallo - Jul 25, 2020 at 2:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The market is practically giving these income streams away.

COVID-19 has had a devastating effect on the U.S. economy. One of the many hard-hit sectors has been energy as demand for oil has weakened, which forced many producers to turn off some of their pumps. That's had a trickle-down effect on pipeline companies since the reduced volumes impacted their cash flow and ability to pay dividends. This issue has weighed on valuations across the sector.

Because prices have tumbled, dividend yields have skyrocketed, enabling investors to pick up some big-time payouts at bottom-of-the-barrel valuations. Three such opportunities are master limited partnerships Plains All American Pipeline (PAA 0.86%)Crestwood Equity Partners (CEQP 0.27%), and Magellan Midstream Partners (MMP 1.59%).

A roll of cash next to a calculator and a sticky note with the word dividends.

Image source: Getty Images.

Insanely cheap oil pipelines

Units of Plains All American have cratered about 55% this year and currently trade at around $8. The main issue weighing on Plains All American is the impact the oil market downturn has had on its volumes and cash flow.

The downturn forced Plains All American to revise its 2020 guidance to reflect the current market conditions. While the oil pipeline MLP expects lower volumes to cut its transportation earnings by $300 million this year, it anticipates clawing half of that back from its supply and logistics business, which will benefit from other market opportunities. Now Plains All American only expects its cash flow to be about 5% below its initial guidance, putting it at about $2.16 per unit. That's enough money to cover its current distribution -- which yields 8.9% even though it reduced the payout by 50% earlier this year to conserve cash -- by a whopping 240%. Meanwhile, divide that cash flow projection by the unit price, and Plains All American trades at a ridiculously low 3.8 times cash flow.

A monster yield that looks like it will survive

Units of Crestwood Equity Partners have plunged more than 50% this year, pushing their price down to around $14.50. Like Plains All American, the main issue weighing on Crestwood is the impact the oil market downturn will have on its volumes and cash flow.

When crude oil prices crashed earlier this year, Crestwood reset its guidance expectations, cutting its cash flow forecast to between $290 million and $340 million. While that's about 14% below its initial estimate at the midpoint, it still had the company on track to generate enough cash to cover its dividend -- which currently yields an eye-popping 17% -- and finance its capital projects. 

On a positive note, market conditions haven't been as bad as Crestwood feared. The company recently stated that "we continue to have increasing optimism around the second half of 2020 relative to our revised guidance." Thus, it seems likely that the MLP could deliver results above the low-end of its forecast. With Crestwood currently sporting a market cap of slightly more than $1 billion, it trades for less than 3.7 times its projected cash flow. 

High-quality merchandise for a rock-bottom price

Magellan Midstream Partners' unit price has tumbled about 33% this year, pushing it down to $42. The main issue weighing on the MLP is lower oil and refined product pipeline volumes because of COVID-19, which has put some pressure on its cash flow.

Magellan currently estimates that this year's downturn will push its cash flow down from its initial forecast of $1.2 billion to between $1.0 billion and $1.075 billion. It based this revised outlook on the view that gasoline demand would tumble in the second quarter before recovering, which seems to be happening. That forecast puts the MLP on track to generate enough cash to cover its 9.8%-yielding distribution and most of its capital projects. Meanwhile, with its market value getting cut by a third this year to $9.5 billion, that cash flow forecast implies a valuation multiple of about 9.5 times. That's dirt cheap for this high-quality MLP, which has one of the best balance sheets in the sector.  

Falling values equals higher yields

Dividend yields have an inverse relationship to stock prices. Thus, this year's sell-off in MLPs, which pushed their valuations down, caused their yields to skyrocket. Now income investors can pick up some alluring dividend streams from this badly beaten-down sector.

Matthew DiLallo owns shares of Crestwood Equity Partners LP. The Motley Fool recommends Magellan Midstream Partners. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Plains All American Pipeline, L.P. Stock Quote
Plains All American Pipeline, L.P.
PAA
$11.66 (0.86%) $0.10
Magellan Midstream Partners, L.P. Stock Quote
Magellan Midstream Partners, L.P.
MMP
$51.64 (1.59%) $0.81
Crestwood Equity Partners LP Stock Quote
Crestwood Equity Partners LP
CEQP
$26.18 (0.27%) $0.07

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.