Building My Dividend Porfolio - Sunoco Logistics Partners
Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This is part seven of a ten-part series, which I will be publishing every week until the entire portfolio has been introduced. You can see Part One here, Abbott Laboratories; Part Two, PartnerRe Limited; Part Three, Enterprise Products Partners; Part Four, Cracker Barrel Old Country Store; Part Five, Meredith Corp; and Part Six, Lockheed Martin.
I have been analyzing dividend companies for over six months. I am now more than halfway through constructing a model portfolio of my own that I am presenting to the Motley Fool community, one company at a time. Each week, I am digging deeper into individual companies that are at the top of my consideration list.
I review the companies on seven different criteria: yield, number of years paying and raising dividends, 5-year Dividend Growth Rate (DGR), 5-year projected Earnings Growth Rate (EGR), total return for the past twelve months, PE and payout ratio. I feel that this selection covers the past dividend-paying history, the potential future earnings growth, and the valuation of the company.
I constructed a rating system that awards points for each of the previous named criteria. A “perfect” score would be 28 points, with 4 points awarded in all seven categories.
The next company in my portfolio comes from the oil and gas industry, and is another master limited partnership (the first was Enterprise Products Partners), although one of the lesser-known organizations. Sunoco Logistics Partners (NYSE: SXL) received 18 points on my rating scale.
Sunoco is involved in the transport and storage of crude and refined oil products in the United States. The company owns and operates approximately 2,500 miles of pipeline that transport refined products such as gasoline, heating oil, diesel, jet fuel and LPG. Approximately 5,000 miles of pipelines transport crude oil to refineries in Oklahoma and Texas. The company also owns and operates significant terminal and storage families as well.
In terms of its potential as a dividend-generating stock, I look at the current dividend metrics. Sunoco’s yield is 3.7% and it has a 10-year history of consistently paying and raising dividends. The last raise in its dividend was November 14, 2012, for an increase of 10% over the previous quarter’s distribution. The company’s 5-year dividend growth rate (DGR) is 10.6%. The dividend payout ratio is 49%, which is very reasonable and allows for a bit of wiggle room if earnings disappoint.
Future Earnings Metrics
In terms of future earnings growth, the 5-year earnings growth rate (EGR) as estimated by the 12 analysts who cover the company is lower than its competitors, at 8.7%, as compared to the growth rate for the industry of 14.1% and for the sector of 13.5% (The S&P 500 5-year EGR is currently 9.0%). SXL’s FY 2012 estimate for earnings, which are expected to be announced on January 22, is $3.82, compared to last year’s actual $2.54, an increase of 50%. The estimate for 1Q 2013 is 15% higher than 1Q 2012.
The company has a TTM PE of 14.7, based on today’s price of approximately $94. The average PE in the Basic Materials sector is 21.0, and in the Oil and Gas Pipelines industry the average PE is 18.0.
Sunoco Logistics is currently trading at about 2% less than its 52-week high of $57.40 and is up 54% from a year ago. Its twelve month total return is 55.8%.
The Motley Fool community rates SXL a four-star CAPS pick, with 174 Bulls and 11 Bears (94% positive sentiment). The 12 professional analysts who cover the company rank it a 2.3 (1.0 = Strong Buy, 5.0 = Sell) with four Strong Buys, two Buys, and six Holds. They have assigned a one-year average target price of $54.95, which is lower than where the stock is currently trading.
Zack’s Equity Research upgraded Sunoco Logistics Partners to a Strong Buy on Jan. 12, citing the excellent third quarter 2012 results and expectations for an equally strong fourth quarter. Third quarter earnings were aided by higher crude oil prices and lower interest expenses, two situations which are expected to carry forward. After the third quarter results were announced, the company raised its quarterly distribution by 10% to 51.75 cents per unit (versus the previous quarter’s distribution), which is a full 25% higher year-over-year.
I looked at one of the most popular companies in the Oil and Gas Pipeline industry, Kinder Morgan Partners (NYSE: KMP). Naturally, I have examined this one several times in my current quest for the perfect dividend companies. KMP is currently trading at $88 per share and yields 5.7%. The company has been paying and raising dividends for 16 years, the 5-year DGR is 7.5%, the EGR is 11.98%, the PE is 54.1 and the payout ratio is close to 300%. Granted, the payout ratio should be high because this is an MLP, which pays out the majority of its income as distributions by law, but 300% seems a bit excessive. The company just announced 4Q 2012 earnings, and they beat estimates by 14%, delivering 75 cents per share versus the analyst mean estimate of 66 cents.
The share price has gained only 3% over the last twelve months, which is another disappointment in my eyes. Kinder Morgan Partners scores only a 10 on my dividend ratings scale.
I also re-examined Enterprise Products Partners (NYSE: EPD), another pipeline MLP that I added to my Dividend Portfolio in December. It is currently trading at $55 per share (up from $50.05, where I bought) and yields 4.8%. The company has been paying and raising dividends for 15 years, the 5-year DGR is 7.8%, the EGR is 7.2%, the PE is 19.2 and the payout ratio is 84%. EPD’s total return over the last twelve months is 54.9%. Based on my original analysis, I am still happy with EPD in my portfolio; it scores a 19 on my ranking system.
Sunoco Logistics has many strengths, including excellent historical dividend growth, an attractive yield, a reasonable PE, analyst support, and terrific growth over the past twelve months. It is now the seventh stock in my new dividend portfolio.
I will begin tracking it based on the closing price on the day that this article is syndicated.
khern0203 has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!