Dividend investors crave predictability. Once they lock onto payment streams, they don't want to hear about any interruptions. And if a company dares to withhold a quarterly dividend payout, then many investors simply head to the exits.
I discussed this phenomenon recently with regard to Carl Icahn and his big stake in CVR Refining (NYSE: CVRR).
As I noted earlier this month, CVR had a big hiccup with its third-quarter dividend, but it appears positioned to pay out $3 or $4 per unit in dividends next year. Shares trading around $22 don't begin to reflect that potential income.
Amazingly, a virtually identical scenario has just played out with another oil refiner. And the setup is every bit as compelling.
A series of technical problems at a key refinery led to a sharp drop in output for Alon USA Partners (NYSE: ALDW), the master limited partnership (MLP) of Alon Energy (NYSE: ALJ). In fact, the quarterly production was so weak that Alon USA Partners didn't simply make less money -- it lost money. And though investors were bracing for a smaller than usual dividend, they got nothing. Shares of ALDW, which traded up toward the $30 mark in the spring, are now below $14.
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Frankly, even excluding the technical problems at a major refinery, Alon USA Partners was headed for dividend woes anyway. A sharp compression in refining margins thanks to a narrowing spread between Brent crude and West Texas Intermediate crude has hurt all refiners in recent quarters. I discussed this phenomenon back in August, yet, as I noted in my look at CVR Refining, the spreads are starting to widen again, which should create much better profit margins for refiners next year.
What does this mean for Alon USA Partners? That future profit margins -- and the associated dividends they imply -- should never be assumed to be as good as they were last spring, when a quarterly dividend of $1.48 per unit was paid April 30 (working out to a solid $5.92 per unit on an annualized basis). But nor should investors assume zero dividends in the future.
Goldman Sachs suggests an understanding of seasonality is crucial: "Refiner earnings typically trough in fall/winter and rise in spring/summer; in our view, it is not logical to value refining MLPs on the basis of either trough or peak earnings/distributions." Instead, Goldman asserts "normalized" annual payouts should be your benchmark, and its analysts estimate ALDW will pay out $2.50 to $3 per unit in 2014 and beyond. Shares trading below $14, have an effective yield approaching 20%.
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It's not just the rebounding payout you should anticipate. Goldman thinks investors will bid shares all the way back up to $24, once they come to grasp what a normalized flow of annual dividends looks like. Huge upside and a great yield are always a winning combination.
For that matter, it's wise to take a fresh look at all the refiners. The rising output of oil in the U.S. means that domestically refined products are rapidly displacing imported gasoline, diesel and other distillates, while also setting the stage for a robust export opportunity.
A bullish vote of confidence from this group: In the most recent earnings season, Marathon Petroleum (NYSE: MPC), Phillips 66 (NYSE: PSX) and Tesoro (NYSE: TSO) all boosted their share buyback programs. That should set the stage for solid earnings growth in 2014 as the industry stars realign. But these refiners' dividend yields hover around 2%, which has partially kept them out of favor.
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I remain partial to HollyFrontier (NYSE: HFC), which has a dividend yield exceeding 4%, a very strong balance sheet, and a path to cost cuts. But if you're looking solely for yield, CVR Refining and Alon USA Partners, with their prospective yields exceeding 20%, simply can't be beat.
Risks to Consider: As a downside risk, a sharp drop in Brent crude resulting from reduced tensions in Libya, Iran and elsewhere would pressure the profit spreads of domestic refiners.
Action to Take --> It's pretty clear that you want to buy these stocks when refining margins are getting crushed and sell them when they post sharp rallies, as they did in the spring of 2013. The good times never last, but nor do the bad times. On a broader level, the long-term profit picture for refiners is quite solid, thanks to growing U.S. oil production.