The following is a guest blog post from SureDividend:
With interest rates back on the decline, income investors are in a challenging position. Investors can turn to high-yield dividend stocks to gain higher levels of income.
Three high yield securities that look particularly appealing for income investors today are Energy Transfer (ET), Tanger Factory Outlets (SKT), and Inter Pipeline Ltd. (IPPLF) due to their solid business models, competitive advantages, and attractive and sustainable dividends.
This article takes a detailed look at the above 3 securities. Energy Transfer, Tanger Factory Outlets, and Inter Pipeline are attractive high-yield stocks for income investors.
Energy Transfer is the second-largest energy midstream Master Limited Partnership (MLP) based on market cap and the largest based on enterprise value. The company has a gas gathering capacity of 12.8 million Btu/day and an oil gathering capacity of 4.3 million barrels per day.
Its second quarter results were excellent. It reported 2x distribution coverage for the second straight quarter while setting a quarterly record of $2.82 adjusted EBITDA. These results were driven by significant growth in four of its five core business and record operating performance in its natural gas liquids and refined products segments.
Looking ahead, we expect the company’s performance to remain strong thanks to its broadly diversified (across geography as well as the energy value chain as one of only three operators servicing all fifteen major U.S. oil and gas producing regions in the country) asset base and stable cash flows (nearly 90% of its cash flow is tied to long term, commodity resistant contracts and the majority of its contracts are volume committed).
Energy Transfer also enjoys a solid and rapidly improving balance sheet. It enjoys an investment grade (Baa3 stable rating from Moody’s) credit rating and is deleveraging rapidly thanks to strong growth funded largely by retained cash flows.
While its current results, asset base, and balance sheet are all attractive, what we like best about Energy Transfer is its very cheap valuation. Its Enterprise Value to EBITDA multiple is the lowest among blue chip peers and its price to annualized first half distributable cash flow multiple is under 5.5x, implying a DCF yield of nearly 19%. This means that their 9.1% yield is not only extremely attractive, but also very safe, especially when combined with the stable nature of its cash flows.
Tanger Factory Outlets
Tanger Factory Outlets is a retail Real Estate Investment Trust (REIT) that specializes as the only pure play outlet shopping center REIT in the U.S. It currently owns 39 properties across 20 states and in Canada and services nearly 190 million shoppers annually.
While recent results have not been strong and same-center NOI declined slightly by 0.3% year-over-year in the latest quarter, the business model retains many of its key strengths and competitive advantages. These include a 9.9% tenant occupancy cost ratio (lower than any mall REIT), continued growth in sales per square foot, 96% occupancy (higher than any mall REIT), and 3.5% blended straight line rent spreads. The company is also growing its customer loyalty club (“TangerClub”) successfully, with 12% year to date growth and member spending levels that are 63% higher than non-members.
The balance sheet also remains very strong. The company’s line of credit is 97% untapped and 94% of its square footage is unencumbered, giving it enormous liquidity. Furthermore, its bond covenants: total debt to adjusted total assets, secured debt to adjusted total assets, unencumbered assets to unsecured debt, and interest coverage ratios all enjoy substantial leeway. It also enjoys a BBB stable credit rating from S&P, indicating the strength of its balance sheet. Furthermore, it has no major maturities until its lines of credit and term loan comes due in October 2022, giving it plenty of time to refinance. Overall, it has an average time to maturity of 5.9 years and an effective interest rate of just 3.6% (of which only 3% is floating rate) on its debt.
Most importantly, its dividend is extremely attractive and well-covered. The stock currently yields 9.7% and has an FFO payout ratio of just 56%. With management having a commitment to continuing growing the dividend payout each year, aided by buybacks and debt paydown with retained cash flow, investors are primed to achieve double-digit annualized total returns from current levels.
Inter Pipeline – similar to Energy Transfer – is an energy infrastructure company founded, though significantly smaller with a $7.7 billion market cap. The company transports, processes, and stores energy products primarily in Western Canada and at a much smaller scale in Europe. Based on 2019 guidance, the company derives the majority of its income from its Oil Sands Transportation business, about a quarter of it from its Natural Gas Liquids Processing segment, and about 10% each from its Conventional Oil Pipelines and Bulk Liquid Storage assets.
Recent results were not very positive as revenue only increased 2% year over year and Funds from operations fell 8% and declined 13% on a per-share basis. This was in large part due to pipeline volumes falling 3% and bulk liquid storage declining about 1%. Furthermore, even though natural gas liquids processing volumes increased 18%, FFO for the NGL segment fell 29% year over year and was the biggest drag on FFO.
Despite the disappointing quarter, future growth prospects look bright. The company’s growth capital expenditures roughly doubled to $364 million as the company continued its multi-year investment in the Heartland Petrochemical Complex. Inter Pipeline also announced the completion of the Kirby North Connection project, which will bring in substantial cash flow that is underpinned by a long-term take-or-pay agreement with Canadian Natural Resources (CNQ). Management also recently announced a $100 million conventional pipeline project to connect its Bow River and Central Alberta pipeline systems. This project is expected to complete in the first half of 2020.
In addition to strong future growth expectations, Inter Pipeline boasts a strong balance sheet as evidenced by its BBB+ credit rating from S&P and a very attractive valuation. Its dividend yields 7% and is backed by a conservative 71% payout ratio. With mid-single digits expected long-term annual FFO per share growth and a high dividend yield, investors should be able to achieve double-digit returns with fairly low risk, thanks to the strong balance sheet and fairly stable business model.
Energy Transfer, Tanger Factory Outlets, and Inter Pipeline all offer investors well-covered yields exceeding 7% supported by solid investment grade balance sheets and fairly stable, recession-resistant underlying business models. As a result, they provide a good starting point for investors looking to build a fairly conservative high-yield income portfolio.