Master limited partnerships (MLPs) Buckeye Partners (NYSE: BPL) and Martin Midstream Partners (NASDAQ: MMLP) currently yield a jaw-dropping 13.7% and 17.4%, respectively. Both payouts are well above the 8% average yield of MLPs held in the Alerian MLP Index, which is a clear sign that the market doesn't believe in the long-term viability of these payouts. Their unsustainability is even more apparent when we look at the embarrassingly weak financial profiles currently backing these payouts, which is why investors should steer clear of these high-yield stocks.
Hinting at what everyone already knows is coming down the pipeline
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Through the first half of this year, Buckeye Partners has paid out $371.5 million in cash to investors to support its high-yielding distribution. There's just one problem with this: The company's operations have only generated about $331 million in distributable cash flow, which is money it could pay to investors. That means the company has only covered its payout with cash by 0.89 times, which isn't sustainable over the long term. On top of that, the company's leverage ratio stood at 4.3 last quarter, which is above the sub-4.0 comfort zone of most MLPs.
While Buckeye has repeatedly stated in the past that it planned on maintaining its payout, the company changed its tune last quarter. CEO Clark Smith noted on the accompanying conference call that, "we are assessing our capital structure and the potential benefits of transitioning to a self-funding model for the equity portion of our growth capital requirements, limiting our dependency on public equity markets." This means the company is considering cutting its distribution to a level where it can not only cover that smaller payout, but a significant portion of growth-focused capital spending with cash flow. Given that most rivals have already shifted to a self-funding model, it seems highly likely that Buckeye will join them and move away from its currently unsustainable business model.
Desperately trying to maintain the status quo
As bad as Buckeye's financial situation might be, it pales in comparison's to Martin Midstream Partners' financial profile. During the second quarter, the company only generated enough cash to cover its sky-high distribution by an embarrassing 0.56 times. Further, its leverage ratio was deeply concerning, at 5.46.
However, the company did take a major step toward improving those numbers by recently selling its 20% interest in the West Texas LPG Pipeline to its joint venture partner ONEOK (NYSE: OKE). It was a win-win deal for both companies. In ONEOK's case, it now has full control over a pipeline that it intends on expanding further in the future. Meanwhile, the deal provided Martin Midstream with some much-needed cash as well as saving it from having to come up with funding for those expansion projects. As a result, the sale helped improve the company's leverage ratio to a slightly better 4.36 while also keeping it on track to maintain a 1.0 coverage ratio for the full year. While those are dramatic improvements, the company's payout still isn't sustainable, which suggests that Martin Midstream will likely need to reduce its high-yielding distribution at some point in the future.
A better option for income-seekers
While the sky high-yields offered by Buckeye and Martin Midstream might tempt some yield-starved investors, those payouts aren't worth the risk since it appears as though both companies could reduce them. Instead of those risky income streams, investors might want to consider ONEOK's dividend. While the pipeline giant's current yield of 4.9% isn't as attractive, the company has generated enough cash to cover by it a comfortable 1.38 times so far this year, and it expects to be able to increase its dividend at a 9% to 11% annual rate through 2021 even as it maintains conservative financial metrics. Add the company's high yield to its compelling growth prospects and strong balance sheet, and ONEOK is in a class of its own.
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