Martin Midstream Partners L.P. Upgraded: How Safe Is Its Distribution?

Martin Midstream Partners (NASDAQ: MMLP) units are surging in Tuesday trading, up more than 3% at last report, on the back of a big upgrade from Stifel Nicolaus.

Why should you care? Well, for one thing, Stifel Nicolaus is one of the best stock pickers we track here at Motley Fool CAPS, ranking in the top 5% of all investors worldwide, and currently beating the market by an average of nearly 10 percentage points per stock pick it makes. And here's something else you should know:

Stifel believes that Martin Midstream Partners units, which cost only $16 and change today, are worth closer to $19. When you add the 14% difference between those two prices to the 12.4% dividend yield that Martin Midstream is paying, you end up with the prospect of a 26% payday for new investors.

Here are three other things you should know.

Stifel Nicolaus sees a green future surrounding oil terminal operator Martin Midstream Partners. Image source: Getty Images.

1. Like a stock, but not really

Martin Midstream Partners L.P. describesitself as "a publicly traded master limited partnership with a diverse set of operations focused primarily in the United States Gulf Coast region." Specifically, financial data service S&P Global Market Intelligence explains that Martin Midstream "transports, stores, and markets petroleum products and by-products in the United States Gulf Coast region," operating everything from natural gas storage facilities to a 200-mile-long gas pipeline to 45 separate terminal facilities and 74 barges and boats for transporting fuel and chemicals.

Technically a partnership, when you buy into Martin Midstream Partners you are actually buying units of the partnershiprather than shares of stock.

2. Why to buy

And why might you want to buy such units? Well, Martin Midstream employs all of these assets listed above to generate distributions -- akin to dividends -- for its partners, and those distributions can be rich indeed.

According to Yahoo! Financedata, Martin Midstream currently pays its owners "dividends" (actually distributions) on their units worth nearly 18% annually. S&P Global data is a bit more conservative, estimating Martin Midstream's yield at closer to 12.4%. Investors considering a purchase in this stock should probably assume that is the correct rate, inasmuch as it's derived by extrapolating Martin Midstream's most recent quarterly distribution ($0.50 per unit) into the future -- rather than assuming that past quarters' distributions ($0.81 per unit)will return.

Even so, $0.50 a quarter, times four quarters, works out to $2 in distributions every year. And weighed against Martin Midstream's pre-upgrade price of $16.15 per unit, that's still a very respectable 12.4% dividend (er, distribution) yield.

3. Why Stifel says you should buy

The longer you wait to buy, though, the worse that dividend yield may become. As Stifel explains in a write-up covered by this morning, Martin Midstream's unit price has declined "approximately 19% since it released 3Q2106 earnings on October 27, 2016." But because Martin Midstream is a "turnaround story," Stifel thinks the stock's price will rise again shortly -- and the more expensive the stock becomes, the worse the distribution yield will become over time.

E.g., $2 in distributions paid on the $16.15 that Martin Midstream cost yesterday is a 12.4% yield, but $2 on the $16.66 that Martin Midstream costs today is already down to 12% -- and $2 paid on Stifel's projected price of $19 for Martin Midstream would equal a yield of only 10.5%. Simply put, if you want the richest yield, you need to buy when the stock is cheapest.

Final thing: Is Martin Midstream safe to buy?

Three months ago, my Foolish colleague Matt DiLallo warned investors that Martin Midstream's then insanely rich 16.6% distribution yield was "nothing but a trap" and doomed to be cut, given that the company lacked sufficient distributable cash flow to fund it. He was right -- but the trap has now been sprung. Martin Midstream was paying out $0.81 a unit per quarter back then when Matt wrote those words. But it's paying only $0.50 now.

Thanks to this cut, the company's more modest distribution today consumes only $71 millionof the company's $113.6 millionin annual distributable cash flow. That's a payout rate that should be more sustainable than in quarters past. And as it is sustained, and investors grow more comfortable with the new payout rate over time, Stifel Nicolaus just might be proven right:Down 19% over the past few weeks, Martin Midstream Partners stock could begin flowing back upstream again.

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Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he currently ranks No. 340 out of more than 75,000 rated members.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.