Delek Logistics Partners (NYSE: DKL) flies under the radar of most Wall Street analysts. Only a handful of them cover the company, and those who do have differing opinions, with two rating it a hold, one a buy, and another a strong buy.
Given its lack of coverage, most investors likely don’t know how good the master limited partnership (MLP) has been at distributing cash to its investors. It recently delivered its 46th consecutive quarterly distribution increase. The nearly 2% raise pushed its yield close to 11%.
That monster income stream is on a sustainable foundation and should continue heading higher. That makes it a very attractive stock for income.
Building a solid foundation
Delek Logistics generates a lot of stable cash flow. The midstream company provides logistics services to its parent, refiner Delek US Holdings (NYSE:DK), and third-party customers. It recently amended and extended its agreements with Delek US for up to seven years, increasing its long-term visibility.
Meanwhile, it has been working to diversify its exposure to its parent by acquiring and building assets to support third-party customers. It currently gets half its earnings from its parent, a number it expects will decline to 36% in the second half of next year as it continues growing its third-party volumes.
The MLP generates enough cash to cover its monster distribution payment with plenty of room to spare. It ended the second quarter with a distribution coverage ratio of 1.32 times. That healthy coverage level enables the company to retain added cash to fund its continued expansion and strengthen its balance sheet.
Delek Logistics Partners has been working to shore up its financial foundation by reducing its leverage ratio, which was down to 3.81 at the end of the second quarter from 4.34 at the end of last year and 4.89 at the end of 2022.
The company has been able to lower its leverage while continuing to invest in expanding its operations and cash flow. That has given it the wherewithal to increase its distribution without raising its coverage ratio. The MLP has grown its…
..
