PBF Logistics: 9% Dividend With Upside Potential
Summary
- PBFX is paying a quarterly dividend of $0.30 per share, giving a staggering 9.22% yield.
- Their operations generate strong cash flow, and I believe they will continue to perform in the foreseeable future.
- They have been successfully deleveraging, and the balance sheet has steadily improved over the past couple of years.
- I expect the dividend will likely increase in the near future to match its pre-pandemic level, resulting in a boost in stock price.
industryview/iStock via Getty Images
Investment Thesis
PBF Logistics (PBFX), a subsidiary of PBF Energy, owns and operates refined petroleum product terminals, pipelines, and storage facilities. They present a great investment opportunity for an investor seeking both high dividend yield and potential stock appreciation because:
- PBFX's dividend will likely increase in near future, but the market hasn't anticipated the increase.
- They have strong cash generation ability.
- They are successfully deleveraging and strengthening their balance sheet.
Commodity prices have improved, and dividend rate will follow
Since the pandemic hit the oil and gas industry hard last year, PBFX has been paying a dividend at their minimum quarterly distribution rate of $0.30 per share ($1.20 per share annually). Starting the latter part of 2020, commodity prices have been improving, and the operating condition of PBFX's parent company (PBF Energy) has improved accordingly. Therefore, I believe the dividend payment at its current rate is certainly safe for the foreseeable future, and is likely to return to its pre-pandemic level (quarterly distribution of $0.40 - 0.50 per share) in the near future. As shown in the dividend history trend below, PBFX steadily grew their dividend by 58% over 2015 to 2020, and I expect them to return to this approach now that the oil and gas sector is recovering.
Source: Graph from Seeking Alpha
Strong Cash Generation Ability
PBFX is a fee-based business and has strong cash generation ability. PBFX basically rents out their pipeline and storage units to their parent company and charges them fees through long-term, take-or-pay agreements with an 8-year weighted average base contract. This business model tends to have stable and predictable cash flow. Looking at their cash flow statement, they require about $75.6 M per year to cover the minimum dividend payment, and they have been generating enough cash from operations to cover that level since 2015. From 2015 to 2019 they paid 63-83% of cash from operations in dividends. Given the improving economic conditions, I believe they should be able to maintain or improve cash flow going forward. Based on their 2020 cash from operations of $186.6 M, similar pay out ratios would yield a quarterly dividend of $0.46-0.62, well above the current quarterly dividend of $0.30. The cash from operation vs. dividend paid graph is given below.
Source: Graph generated by author using data from SEC filings
Strengthening balance sheet
Similar to other capital intensive businesses, PBFX carries high debt on their balance sheet. However, their EBITDA ($238.3 M) to interest expense ratio ($43.1 M) shows that their debt level is more than manageable. Additionally, they have been using excess cash from operations to reduce their long term debt level over the past couple of years and strengthen their balance sheet. During their most recent earnings call, management mentioned that they plan to continue paying off long term debt in the foreseeable future. The long term debt trend is shown below.
Source: Graph generated by author using SEC filings.
Intrinsic Value Estimation
I used DCF model to estimate the intrinsic value of PBFX. For the base case, I utilized TTM dividend cash distribution ($74.9 M total distribution, $1.20 per share) and current WACC of 9.6% as the discount rate, assuming perpetual payment at the same rate. For the bullish and very bullish case, I assumed $1.60 per share and $2.00 per share annual dividend payment, respectively, using the same WACC and perpetual payment assumption. The dividend payments of $1.60 per share and $2.00 per share are in line with their pre-pandemic distribution level. Given the improving economic outlook, I believe the company will be able to handle this dividend increase.
The estimation revealed that the PBFX presents an opportunity with a great combination of stock appreciation and nice dividend yields. As mentioned previously, I believe PBFX can maintain or increase their dividend payments due to their strong cash generation, and this will translate into stock price appreciation as well. The very bullish case ($2.00 per share dividend and $20 stock price) is in line with pre-pandemic level performance, and current cash generation is in line or better than the pre-pandemic level.
Price Target | Stock Price Appreciation Potential | Dividend Pay | |
Base Case | $12.46 | -4% | $1.2 per share |
Bullish Case | $16.46 | 26% | $1.6 per share |
Very Bullish Case | $20.62 | 58% | $2.0 per share |
The assumptions and data used for the price target estimation are summarized below:
- WACC: 9.6%
- Current Dividend Payment: $74.9 M ($1.2 per share)
- Current Stock Price: $13.02 (10/01/2021)
- Tax rate: 30%
Risks
PBFX largely depends on PBF Energy's performance. The majority of PBFX's revenue comes from PBF Energy. Therefore, PBF Energy's under-performance or non-payment has a large impact on PBFX's performance. Like most refining businesses, PBF Energy performance fluctuates with commodity prices and the overall economic environment. However, PBFX still managed to generate substantial cash during the pandemic era, arguably one of the worst periods for the oil and gas industry in recent memory, and continued to pay the dividend. Their balance sheet is now the strongest that it has been in the last 5 years.
As more and more people become concerned about climate change and negative environmental impact of fossil fuels, environmental restrictions and government regulations for the oil and gas industry are tightening. These regulations may increase maintenance costs and capital expenditure for PBFX. However, PBFX should be able to pass much of these costs to its direct customer (PBF Energy), and ultimately the consumers, to maintain reasonable margin. Also, the change should be gradual, and PBFX should have ample time to make the appropriate adjustments.
Conclusion
I believe PBFX presents a good investment opportunity. Considering their performance during the pandemic era and the recent improvement in market conditions, I think their current dividend payment is safe, and it will likely increase to its pre-pandemic level in the near future. Stock price is currently valued for the $1.20 dividend yield, so an increase in dividend will bring a 20-50% stock price appreciation along with the 9% dividend yield. I recommend PBFX for an investor who wants a reliable dividend yield and a jump in stock price when the dividend increase is announced.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (40)
Isn't it overpriced?
But since then, it never dropped again to that price...
to be half useless, from my viewpoint. You have to go the the SEC filings to even understand what they do, except from a rudimentary few sentences summary on the site. No purchase for me. Grade schools kids could design a better site.
You might enjoy Berkshire Hathaway’s website. It might have actually been designed by a grade schooler using notepad. https://berkshirehathaway.com
He issues a personal newsletter annually that is forthcoming about his product. What else would you need ? ( Just kidding. )
Yeah, I was really just commenting on the website. I would probably say PBFX is much easier to understand than a conglomerate with a large reinsurance business though. I personally find the BRK homepage delightful.
However, on Oct 4, the date you published this article, PBFX was trading above 13.50/share, and it is now trading at 11.77, a drop of over 12%. Concurrently, the dividend payout is now over 10%, up from 9% when posted, an alarmingly high rate. Obviously, the market does not agree with your enthusiasm.
So now, we must ask "Why?" I suspect the answer lies not in the changing fundamentals of PBFX, but rather in its debt ridden parent, PBF Energy. I would encourage readers to research PBF here on Seeking Alpha, as well as other resources. It is still trading at approximately 30% of pre pandemic levels.
My research has suggested that one possibility to help PBF survive would be to roll up PBFX into the parent, possibly in a stock for stock exchange. Is this what is causing PBFX to underperform? Why? What would be the likely tax consequences to PBFX investors? Any insight regarding this would be duly appreciated. Thank you.
If PBF purchases PBFX for stock in PBFX the tax consequences are the same for you as if they purchase it for cash. It is a sale and you will have ordinary income “recapture” of all previous depreciation deductions (among other things) and then you will have a capital gain or loss depending on your basis plus that ordinary income.
FYI the capital loss doesn’t offset the ordinary income on sale. You can use it to offset capital gains and $3,000 of other income each year, of course.
High yield indeed.
But they decreased their dividend lastly if I read well, correct ... ?
“K-1s are somewhat of an issue. Strongly suggest you find out if they do issue K-1s as that is probably important to your readers.”
They do.“ That discourages individual investors from owning the units. ”
Interestingly it discourages institutions more than individuals because institutions need to finalize their books earlier in the year (they have their own investors, afterall) and waiting for all the K-1s to come in kind of screws with that. There are some other reasons why PTPs are bad ideas for institutions as well.
Thanks
