Consider Spectra Energy Partners For Its 6.1% Sustained Dividend Yield

| About: Spectra Energy (SEP)

Summary

In my view, income-seeking investors should consider SEP's stock.

SEP is a low-risk midstream MLP with virtually no volume or commodity exposure, has increased its distribution every year over the last eight years, and is currently yielding 6.11%.

What's more, the company outlined plans to grow distributions at about 8% CAGR through 2017.

In my view, income-seeking investors should consider Spectra Energy Partners, LP's (NYSE:SEP) stock. The company is a low-risk midstream MLP with virtually no volume or commodity exposure, has increased its distribution every year over the last eight years, and is currently yielding 6.11%.

Spectra Energy Partners, LP operates as an investment arm of Spectra Energy (NYSE:SE). The company engages in the transportation of natural gas and crude oil through interstate pipeline systems, and the storage of natural gas in underground facilities in the United States. According to the company, its natural gas storage and transportation assets generate steady cash flows, primarily backed by long-term contracts. The crude oil pipelines have annual rate escalators that further enhance its favorable cash generation profile. All of its business is fee-based, and more than 90 percent of its assets' revenues come from fees that reserve capacity on its pipelines and in its storage facilities. This profile supports steady cash flows and minimizes the company's exposure to commodity price swings.

Source: Third-Quarter 2015 Supplemental

Since the beginning of 2015, SEP's stock is down 28.1%, while the S&P 500 Index has decreased 8.8% and the Nasdaq Composite Index has lost 4.6%.

SEP Daily Chart

SEP Weekly Chart

Charts: TradeStation Group, Inc.

Last-Quarter Results

On November 4, 2015, Spectra Energy Partners reported its third-quarter 2015 financial results, which beat EPS expectations by a big margin of $0.33 (44.6%). The company showed significant earnings per share surprise in three of its last four quarters, as shown in the table below.

Data: Yahoo Finance

Third-Quarter Highlights

  • Distributable cash flow of $270 million, up $23 million over prior-year quarter
  • Expansion projects continue to contribute to earnings growth - up 16% over prior-year quarter
  • 32nd consecutive quarterly cash distribution increase

In the report, Greg Ebel, chief executive officer, said:

With virtually no volume or commodity exposure, Spectra Energy Partners is a low risk midstream MLP, which has allowed us to provide quarterly distribution growth for our investors over the last eight years. The new projects we've placed into service in 2015 will generate EBITDA of $105 million on an annual basis. Going forward, our $5.7 billion portfolio of fee-based projects in execution, coupled with our strong base business, will continue to drive increased EBITDA and provide us with a clear path for continued distribution growth.

Fourth Quarter

Spectra Energy Partners is scheduled to report its fourth-quarter 2015 financial results on Wednesday, February 3, before market open. According to 14 analysts' average estimate, Spectra is expected to post a profit of $0.77 a share, a 2.5% decline from its actual earnings for the same quarter a year ago. The highest estimate is for a profit of $0.94 a share, while the lowest is for a profit of $0.31 a share. Revenue for the fourth quarter is expected to increase 6.3% year over year to $637 million, according to 9 analysts' average estimate. There were two EPS up revisions during the last seven days and four up revisions during the last thirty days. Since Spectra has shown significant earnings per share surprise in three of its last four quarters, there is a good chance that the company will beat estimates in the fourth quarter too.

I see robust growth prospects for Spectra Energy Partners. According to the company, overall, 2015 has been a successful year for delivering projects into service and demonstrating its project execution advantage. Looking forward, Spectra's project backlog has almost $9 billion projects still to be placed into service, these projects are underpinned by executed customer agreements. It is worth noting that about 75% of the company's expansion CapEx and execution is supported by secured contracts with demand pull customers such as local gas distribution companies, further demonstrating the strength of its current project backlog in this environment. The company has a robust portfolio of opportunities and development that will lead to continued growth in 2018 and beyond, and it is working diligently towards advancing those projects.

Source: Third-Quarter 2015 Supplemental

Distribution

Distributable cash flow [DCF] in the first three quarters of 2015 was at $945 million, 16.7% higher than in the first three-quarters of 2014, which allowed the company to increase its distribution four times in 2015.

Source: Company's Reports

On October 19, 2015, Spectra Energy Partners announced that the board of directors of its general partner declared a quarterly cash distribution to unitholders of $0.62625 per unit, an increase of 1.25 cents over the previous level of $0.61375 per unit. This is the 32nd consecutive quarter that it has increased its quarterly cash distribution. In February 2015, SEP outlined plans to grow distributions at about 8% CAGR through 2017. The forward annual distribution yield is pretty high at 6.11%, and the payout ratio is at 72.8%. The annual rate of dividend growth over the past three years was at 6.7%, and over the past five years was at 8.3%.

Source: Third-Quarter 2015 Supplemental

SEP Dividend Chart

SEP Dividend data by YCharts

Valuation

SEP's stock is trading near book value; its price-to-book is at 1.09. The trailing P/E is very low at 12.56, the forward P/E is also very low at 12.89, and the Enterprise Value/EBITDA ratio is at 12.41.

In addition, most SEP's margins parameters have been much better than its industry median, its sector median, and the S&P 500 median, as shown in the table below.

Source: Portfolio123

Ranking

According to Portfolio123's "Fiscal Momentum" ranking system, SEP's stock is ranked third among all 169 energy stocks yielding more than 4%.

The "Fiscal Momentum" ranking system is a momentum strategy that rates stocks based on five composite scores related to Earnings, Technical, Valuation, Industry, and Fiscal Momentum, as shown in the Portfolio123's chart below.

Backtesting over sixteen years has proved that this ranking system is very useful.

Summary

In my view, income-seeking investors should consider SEP's stock. This is a low-risk midstream MLP with virtually no volume or commodity exposure, has increased its distribution every year over the last eight years, and is currently yielding 6.11%. What's more, the company outlined plans to grow distributions at about 8% CAGR through 2017. I see robust growth prospects for the company. Spectra's project backlog has almost $9 billion projects still to be placed into service; these projects are underpinned by executed customer agreements. It is worth noting that about 75% of the company's expansion CapEx and execution is supported by secured contracts with demand pull customers such as local gas distribution companies. SEP's valuation is good, the stock is trading near book value, the trailing P/E is very low at 12.56, and the forward P/E is also very low at 12.89. Furthermore, according to Portfolio123's "Fiscal Momentum" ranking system, the stock is ranked third among all 169 energy stocks yielding more than 4%. All these factors bring me to the conclusion that SEP is a smart long-term investment.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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