Forward yield is higher compared to peers
Distribution yield is calculated by dividing distribution per share by market price per share.
At 9%, ONEOK Partners’ (OKS) forward distribution yield is ~180 basis points higher than the average of selected peers. The companies included in this average calculation are Targa Resources Partners (NGLS), Enbridge Energy Partners (EEP), Energy Transfer Partners (ETP), and Enterprise Products Partners (EPD).
Lower expected distribution growth
For the next two years, OKS expects distribution growth to be 3%. In comparison, NGLS, EEP, ETP, and EPD expect to have distribution growths of 5%, 5.2%, 6.7%, and 6%, respectively. So OKS’s higher yield seems to be justified by its lower-than-average forward distribution growth.
Likewise, OKS’s distribution growth estimates for the next year are lower than its peers’ estimates. The above graph compares OKS’s and its peers’ forward distribution yields relative to their distribution growth.
The Alerian MLP ETF (AMLP) has traded at a yield of 7% over the last 12 months. AMLP seeks to track the performance of the Alerian MLP Infrastructure Index. OKS’s yield is higher than the average among MLP infrastructure companies, as represented by AMLP. OKS forms ~4.5% of AMLP.
Distribution yields for MLPs that are less sensitive to commodity prices tend to be lower than MLPs that are more sensitive to commodity price volatility. This is because investors expect higher risks to be compensated for with higher yields.
OKS’s distribution coverage ratio for the latest quarter is 0.6. A low distribution coverage ratio increases the risk that the company’s expected distribution is unsustainable. Higher risk must be compensated for with higher yields.