Trading stocks day in and out can be a tiresome gamble, and is the antithesis of passive investing. That’s why I’d rather adopt the ‘buy right and hold tight’ strategy when it comes to stocks that shower investors with meaningful cash flow.
Such stocks can be found in REITs, BDCs, and MLPs, which carry tax-favored structures that are designed to pass through their income to investors, and carry attributes such as steady income, potential for long-term growth, lower risk, and inflation hedges.
Plains All American (NASDAQ:PAA): A Reliable Dividend Payer
With the recent downturn in price, as shown below, I believe it presents an opportune time for investors to layer into the stock. In this article, I explore the company including its most recent quarterly results, and discuss why this 7.3% yielding stock should be on investors' radar, so let’s get started!
Diversified Assets and Strong Performance
Plains All American issues a K-1 and is an energy midstream company that owns a large network of pipelines, transporting over 8 million barrels per day of crude oil and natural gas liquids. As shown below, PAA’s assets are diversified across the Permian Basin, Canada and Rocky Mountains, Mid-Continent, and South Texas / Gulf Coast.
Steadily Improving Results
PAA has been demonstrating steadily improving results driven by strong demand, and this has resulted in total return outperformance over the past 12 months. PAA’s 23.5% total return bested the 19.6% of the S&P 500 (SPY) and 16% of Enterprise Products Partners (EPD), while MPLX LP (MPLX) has produced a better return of 27%.
Strong Financials and Growth Strategies
PAA continues to execute well, achieving adjusted EBTIDA of $674 million during Q2 2024, exceeding expectations. This was driven by benefit of higher tariff volumes and market-based opportunities in the crude oil segment. PAA’s NGL segment also saw favorable spreads and experienced lower than expected operating expenses.
Value-Added Acquisitions and Steady Revenue Streams
Also encouraging, management raised its full-year adjusted EBITDA guidance by $75 million to $2.75 billion at the midpoint, supported by its strong year-to-date performance and contributions from the acquisitions it’s made since 2022 for a total investment of $535 million. These acquisitions complement PAA’s existing assets and enhance its growth profile.
Strong Balance Sheet and Growth Potential
Importantly, PAA carries a strong balance sheet with a BBB credit rating, supported by $3.2 billion in liquidity and a low debt to equity ratio, putting it on par with that of Enterprise Products Partners. PAA's 7.3% distribution yield is well protected by a 190% DCF-to-Distribution coverage ratio, and it aims for annual dividend raises until a 160% coverage ratio is reached.
Attractive Buying Opportunity
PAA appears to be bargain priced after the recent drop with a Price-to-Cash Flow below that of peers EPD and MPLX. With strong fundamentals, expected cash flow growth, and a strategic shift towards more fee-based business, PAA is positioned for steady growth.
Risks and Investor Takeaway
The risks to the thesis include economic downturns, cost inflation, unforeseen events, and commodity price swings. However, Plains All American presents an attractive buying opportunity on the dip for income-focused investors, offering a well-covered distribution yield and a strong balance sheet. With diversified assets and a strategic shift towards fee-based business, PAA is positioned for steady growth. In conclusion, PAA's recent performance, acquisition strategy, and valuation relative to peers suggest it could provide meaningful long-term returns, making it a compelling choice for conservative investors.