Small-Cap Corner: A Yield Star
With a current market value of $1.7 billion, Atlas Pipeline Partners (NYSE: APL) is, by definition, a small-cap stock. What isn't small about this unheralded master limited partnership (MLP) is its yield. As interest rates have remained artificially low in the U.S. for several years, investors have been all but chased out of cash instruments and Treasuries and forced to search for yield elsewhere.
That explains the substantial outperformance offered by MLPs as a group over the past several years. However, Atlas, which owns and operates approximately 9,100 miles of intrastate natural gas gathering systems located in Oklahoma, Kansas, Texas, and Tennessee, has not gotten in on the act. In the past year, the units are down 10% and over the past five years, Atlas is down a dismal 34.7%.
Part of the reason for that ugly performance can be attributed to two distribution cuts by Atlas during the financial crisis. Unit holders' negative reaction was understandable. After all, MLPs are income investments and any cut to an MLP's distribution is sure to chase investors away. That's what happened when Atlas shaved its payout to 38 cents from 96 cents in the first quarter of 2009. Making matters worse, the distribution was reduced further to 15 cents in the second quarter of 2009.
The good news is Atlas' payout is climbing its way higher. While still well below pre-crisis levels, the most recent payout was 56 cents per unit. Since November 2010, Atlas has rewarded investors with seven distribution increases. Today, the units yield a stellar 7.1%.
Atlas reported distributable cash flow, the key metric of an MLP's dividend-paying ability, of $35.2 million in the first quarter, a 32% year-over-year increase.
The red flags revolve around a potential retrenchment in natural gas prices, which despite a recent surge, are still low. A first-quarter debt to capital ratio of 34% is another issue Atlas must address.
Still, there is a bull case. Atlas' gross profits have been steadily increasing over the past three years and the dividend has more than tripled since May 2009. And Atlas has levered free cash flow of almost $120 million, so it can be said there are more reasons to be optimistic Atlas will snap out of its slumber, particularly if natural gas prices can hold steady or increase.
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