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Should Investors Chase Buckeye Partners’ Monstrous Yield?

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Buckeye Partners’ distribution yield

Buckeye Partners (BPL) was trading at a very high distribution yield of 14.6% on July 5. The partnership’s current distribution yield is significantly higher than its trailing-one-year and trailing-three-year averages of 10.7% and 8.4%, respectively.

Moreover, BPL’s current distribution yield is higher than that of the Alerian MLP ETF (AMLP). AMLP was trading at a yield of 8.2% on July 5. BPL’s peers NuStar Energy (NS), Magellan Midstream Partners (MMP), and Plains All American Pipeline (PAA) are trading at distribution yields of 10.4%, 5.5%, and 6.2%, respectively.

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Is BPL’s high yield sustainable?

Buckeye Partners was unable to cover its distribution in the recent quarter. BPL’s distribution coverage stood at 0.91x during the first quarter of 2018 despite its flat distribution of $1.2625 per unit for the last three consecutive quarters. A distribution coverage of below one indicates that a partnership is unable to cover its distributions from internally generated cash flows.

Organic projects and strong volume growth from the Permian region could boost BPL’s distribution coverage in the coming quarters. On the other hand, weak performance at Buckeye Partners’ Merchant Services segment and low capacity utilization at its Global Marine Terminals could continue to weigh on its earnings for the remainder of 2018.

A further fall in BPL’s distribution coverage going forward, along with its high distribution yield, could warrant a distribution cut. However, the partnership’s management remains optimistic that there will be no distribution cuts in the near future. According to the recent investor presentation, “Buckeye has operated in the past with distribution coverage below 1x but the distribution policy remained unchanged during those periods based on the improvement expected over the longer-term outlook.” 

We’ll get a clearer picture about Buckeye Partners’ distribution outlook following its second-quarter results for 2018. With that said, investors with higher risk appetites may want to look for a bargain in the partnership’s monstrous yield.

In the next article, we’ll look into analysts’ recent ratings for Buckeye Partners.

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