When a dividend-paying business falls on hard times, the sell-off can lead to some very attractive yields, just by virtue of the stock going down. If such headwinds prove temporary, courageous investors may not only benefit from some very nice payouts, but also reap the gains from stock appreciation.
Here are two high-quality stocks that currently sport very high dividend yields due to near-term headwinds, but which have a good chance of turning things around…
1. Crestwood Equity Partners
Oil and gas midstream operator Crestwood Equity Partners (NYSE:CEQP) is a master limited partnership (MLP) that services the Bakken, Niobrara (Powder River), Permian, and Marcellus basins. Crestwood’s main business is gathering and processing, with smaller segments in storage and transportation, and marketing and logistics.
Crestwood had been on a tear this year, with shares up over 45% for 2019 as of mid-September. However, recent events regarding a key customer have caused shares to fall, halving the year’s gains.
CEQP YEAR TO DATE TOTAL RETURNS (DAILY) DATA BY YCHARTS.
The current concern is due to Chesapeake Energy (NYSE:CHK), Crestwood’s main customer in the Niobrara formation of the Powder River basin. Chesapeake just warned shareholders in its recent quarterly report that if oil and/or gas prices don’t improve, Chesapeake may violate its debt covenants, which could affect its ability to meet its financial obligations in the agreement.
Looking at the impact this could have on Crestwood, last quarter, its Jackalope system in the Powder River Basin accounted for about 15% of the company’s gathering volumes. Crestwood had actually just bought the other 50% of the Jackalope system back in April (it had previously been a joint venture), essentially doubling down on the area. Not only that, but Crestwood is investing in an expansion there, which is set to come online in the first quarter of 2020.
However, these concerns are likely overblown. In 2017, Crestwood restructured its contract with Chesapeake to provide minimum revenue for 20 years until Chesapeake achieves certain volumes. It’s also unlikely that Chesapeake would stop producing in the basin or void the contract there with Crestwood. Crestwood’s systems are essential for Chesapeake to bring oil and gas to market, and the Jackalope system actually lowers Chesapeake’s overall costs, versus trucking oil and gas from its well sites.
If the worst happens and Chesapeake files for bankruptcy, debt holders would then take over and likely utilize Crestwood’s assets. Finally, in its recent quarterly report, Crestwood indicated it was in “late-stage discussions” with third parties in the Powder River basin to utilize Jackalope outside of Chesapeake, diversifying its customer base there.
Crestwood’s stock has fallen about 15% since the announcement and is down over 20% from its 52-week high. That’s caused the company’s dividend yield to increase to a whopping 7.6%, which is well covered by Crestwood’s distributable cash flow almost two times over, leaving plenty of room for Crestwood to maneuver around Chesapeake’s troubles.
Given the fear-driven sell-off, now may be a good time for investors to pounce on the opportunity.
2. AMC Entertainment
The world’s largest movie theater chain AMC Entertainment (NYSE:AMC) has suffered from concerns over…
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