Oil companies are often characterized by high capital involvement and as such, are not considered great dividend paymasters. While this assessment is largely true, there are some exceptions. Calumet Specialty Products Partners, L.P (NASDAQ:CLMT), Ferrellgas Partners, L.P. (NYSE:FGP), and NGL Energy Partners LP (NYSE:NGL) fall in the latter category with dividend yields in excess of 6.5%. However, there is more to these stocks than just great dividends.
Due to the company’s exposure to high margin specialty products, it witnessed a steady net profit margin of 4.4% throughout 2012. This level of profit margin is reserved for big oil refiners. Another positive factor for the company is its recent ground breaking of its Dakota Prairie refinery in North Dakota to benefit from the burgeoning Bakken Shale. Although it will take about 20 months to complete, investors are buoyed by the prospects.
NGL Energy Partners LP (NYSE:NGL) operates a vertically integrated propane marketing and distribution business. The stock has moved up more than 10% over the last one month, but still offers a dividend yield of 6.8%. Other valuation metrics also indicate that the company is worth a closer look. Falling propane prices forced it to look at alternatives last year. The company made four acquisitions in the nine months ending Dec. 31 by paying $53.3 million in cash and assuming $1.3 million in long-term debt.
The most prominent among these buyouts is that of High Sierra in June last year, as it has catapulted the company’s finances to new heights. As a result of the acquisition, NGL Energy Partners LP (NYSE:NGL)’s nine month revenue grew to $2.8 billion from $871 million in the same period last year.
At current prices, the stock is valued at 30 times earnings; however, it reduces to a multiple of just 15 on a forward basis, underlining the impact of the High Sierra acquisition.
Dividend champion or a value trap?
Kansas-based gas distributor Ferrellgas Partners, L.P. (NYSE:FGP) is another player with an exceptional dividend yield of 10.8%. The yield has gone up recently, as the stock has corrected from $21 to $18.5 now. Probably, the only question mark over this stock (and that’s a big one) is the mounting pile of debt.
At the end of January, its debt stood at $1.08 billion, while shareholders’ equity remained in the red. Recent quarterly performance has not been really encouraging with the company reporting lower revenue. To combat lower propane prices, the company seems to be focusing on acquiring small companies to support profits.
This is a materially different strategy than the one used by NGL Energy Partners LP (NYSE:NGL). Earlier this week, the company said it is buying New York-based barbecue accessories company Mr. Bar-B-Q. While financial terms of the deal were not disclosed, it is said to be accretive with immediate effect. This strategy may work in the short-term, but Ferrellgas Partners, L.P. (NYSE:FGP) runs the risk of being saddled with businesses unrelated to its core operations in the long-term.
In conclusion, income investors may want to take a closer look at core operations of Calumet Specialty Products Partners, L.P (NASDAQ:CLMT) and NGL Energy Partners LP (NYSE:NGL) to benefit from not just dividends, but capital gains too. Ferrellgas Partners, L.P. (NYSE:FGP) remains a dark horse which cannot be ruled out, but it requires extra scrutiny for the cautious investor.
The article Place These Dividend Champs on Your Watchlist! originally appeared on Fool.com and is written by Jacob Wolinsky.
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