High-Dividend Stock Has 49 Straight Dividend Hikes, Yields 7%, More Hikes Due In 2017

Summary

• This stock yields over 7%, with 1.10x coverage.
• Management has raised the distribution every quarter since the company's IPO - 49 straight quarters - and is targeting 8% annual distribution growth in 2017.
• The company has a competitive advantage, due to where its assets are located.
• Q4 '16 revenue grew 15%, EBITDA grew 14%, and DCF grew 9%.

"Location, location, location" - you've heard that phrase in relation to retail. Well, it's also important in many other industries, such as the US energy industry, where certain shale plays have cost advantages.

The Permian Basin in West Texas and southeastern New Mexico is a low-cost producing area, where the breakeven is estimated to be somewhere around $32/barrel.

A new research report from Jefferies shows huge declines in wellhead breakeven costs since 2013. Jefferies Global Head of Energy Investment Banking Ralph Eads recently said:

"We have seen an amazing renaissance in oil and gas M&A, largely driven by the Permian Basin. The Permian has become pretty clearly the best oil province on the planet in my opinion, not just the country. This is an asset that's almost nonoptional." (Source: The Deal)

This cost advantage plays to the strengths of midstream firm Holly Energy Partners L.P. (NYSE:NYSE:HEP), and its parent/general partner, HollyFrontier Corp. (NYSE:HFC).

As you can see from the map, HEP and HFC have a strong presence in the West Texas Permian Basin area, with a refinery, several terminals, pipelines and other assets concentrated in this high growth area.

HEP derives 80% of its revenues from long-term contacts with minimum volume or revenue commitments. 100% of its revenues are fee based, with limited commodity risk. Its earliest contract, 17% of its total business, is up for renewal in 2019.

(Source: HEP site)

Distributions: Due to the stability of its fee-based model, management has been able to continuously grow the distribution through crude oil bust and boom cycles since its IPO.

HEP's most recent distribution was $.6025, which marked its 49th straight distribution hike. Think it'll match Joe DiMaggio's 56-game hitting streak?

Our High Dividend Stocks By Sector Tables track HEP's price and current dividend yield (in the Basic Materials section).

HEP's unit distribution coverage for 2016 was 1.10x, and remained above 1.0 for every quarter except Q3 '16, which was a slow one for many midstream firms.

No real surprises in management's DCF calculations - the biggest addback is depreciation and amortization, which was $70.4M in 2016. The biggest deduction is maintenance capex, which totaled $9.66M in 2016.

(Source: HEP site)

Earnings: Except for EPU, HEP had good growth numbers for Q4 '16; revenue grew 15%, EBITDA grew 14% and DCF grew 9%. EPU was lumpy in 2016 - hopefully it bottomed out in Q3 '16 at $.33. Q4 EPU increased to $.40. HEP still managed to grow EPU by 6.25% in 2016, even though it issued $103 million of equity through a private placement.

Overall distributions grew by 13.59% in 2016 while coverage slipped slightly to 1.14x from 1.17x. Limited Partner unit dilution was kept tame, at 2.07%, but the company did issue $103 million of equity through a private placement in 2016.

Revenues grew faster in 2016 than in 2015, which saw 7.8% growth, while operating income grew 9.3% in 2016 vs. 16% in 2015.

(Source: HEP '16 10-K)

Growth Projects: Management is targeting 8% annual distribution growth and is projecting an additional $100M in EBITDA from these projects. That'd be a 36% jump over 2016's EBITDA of $277M.

With that kind of projected EBITDA growth, it shouldn't have any problems hitting 8% distribution growth in 2017.

(Source: HEP site)

Options: We've just listed a May 2017 covered call trade for HEP in our Covered Calls Table, which also tracks over 25 other income-producing trades.

The May $35.00 bid pays $.95, which gives you a 4.52% yield in a bit over two months, or 22.92% annualized. The ask is $1.45, so you may be able to get more than $.95 for this call option, and increase your yields.

At a $.66 potential price gain, your 1.92% assigned yield would be slightly more than the 1.75% dividend yield for the May dividend, nearly an even trade-off if your shares get assigned prior to the ex-dividend date.

HEP doesn't currently have attractive put-selling yields, but our free Cash Secured Puts Table can give you details on over other trades.

Analysts' Targets: Mr. Market suddenly doesn't care about HEP's illustrious history of raising distributions and future growth. Although HEP has outperformed in 2017, it has trailed the S&P 500 and the Alerian MLP ETF (NYSEARCA:AMLP) over the past month and quarter.

HEP is now 12.37% below analysts' average price target of $37.60.

Valuations: We've updated this valuations table, which includes some midstream firms we've covered in recent articles, such as MPLX LP (NYSE:MPLX), PBF Logistics LP (NYSE:PBFX), Arc Logistics Partners (NYSE:ARCX), Martin Midstream Partners LP (NASDAQ:MMLP), and Great Plains Partners LP (NASDAQ:GPP), in addition to DCP Midstream Partners LP (NYSE:DCP) and Kinder Morgan (NYSE:KMI).

We can't really say that HEP is currently undervalued vs. these other midstream stocks - it has the highest price/book and price/sales, and its price/DCF of 13.25 is the second-highest in the group. Its EV/EBITDA of 12.26 is somewhat below the group average of 12.40. This may be one to put on your watchlist for future pullbacks.

Financials: HEP's ROE is the second-highest in the group - it's kept a lid on unit dilution, opting to finance growth with debt, its debt/equity is the second-highest in the group. However, the strong EBITDA generation has kept the debt/EBITDA at 4.47x.

Debt and Liquidity: Long-term debt grew by 23% in 2016. In July, the company did a private placement of 6% senior unsecured notes due in 2024.

HEP had an operating income/interest expense coverage ratio of 3.71 in 2016 vs. 4.74x in 2015.

HEP's debt is laddered pretty well into the future. Its next major maturities will be in 2018, 2020, and beyond 2021.

(Source: HEP '16 10-K)

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

Disclaimer: This article was written for informational purposes only. Please practice due diligence before investing in any investment vehicle mentioned in this article.

Disclosure: I am/we are long MPLX, GPP, ARCX, MMLP. 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.