Hess Midstream Is Appealing To Value Buyers With Its 9.0% Yield And Buybacks


Hess Midstream Partners LP (HESM) looks appealing to value investors with its 9.0% annual dividend yield and its strong stock buyback program. The combination of this 9.0% yield and an 18% buyback yield produces a total yield of 28% to shareholders.

Hess Midstream is a Houston-based midstream or storage and pipeline company in the oil and gas arena. Its dividend has risen incrementally every quarter since 2017.

Its latest quarterly dividend of 55.59 cents is equal to $2.2236 per share annually. With HESM trading at $24.52 per share on Sept. 26, this gives it an annualized yield of 9.0%. 

Moreover, investors can expect that Hess will keep raising the dividend quarterly as it has done in the past. That effectively raises the yield over 9.0% going forward.

Hess Midstream Partners - Investor Relations

Buybacks Are Strong

In addition, last quarter Hess Midstream Partners bought back $400 million of its common stock. Management does not do this every quarter. They made this clear in the latest Q2 quarterly conference call.

Nevertheless, over the last year, Hess Midstream has bought back $1.15 billion of its shares. That works out to 19% of its $6.0 billion market capitalization. This is the result of its policy of balancing dividend growth with share buybacks. 

The bottom line here is that Hess Midstream has a total yield, including buybacks and dividends of about 28% (i.e., 9% dividend yield and 19% buyback yield). That bodes very well for HESM stock going forward.

In addition, HESM stock has attractive income plays available using covered calls and cash-secured puts.

Income Plays Using Short Option Plays

Investors can earn additional income by shorting out-of-the-money (OTM) covered calls and OTM cash-secured puts. For example, look at the Barchart option chain below.

(Click on image to enlarge)

HESM - Calls expiring Oct. 21 - Barchart - As of Sept. 26

This shows that the $30 strike price for calls expiring on Oct. 21 provides an income of 18 cents per contract. That provides 0.734% of additional income (i.e., $0.18/$24.52), or an annualized rate of 8.8%. Moreover HESM stock would have to rise over 22% before the call contract would be exercised. Even if that happened, the investor would keep the 22% capital gain along with the 0.734% option income yield.

Cash secured puts have an even higher yield. The table below shows that the $22.50 put strike price offers a premium of 48 cents.

(Click on image to enlarge)

HESM - Puts Expiring 10-21-22 - Barchart - As of Sept. 26

This means that once the investor puts up $2,250 for each put contract he can sell a put contract and immediately receive $48.00 per contract. That provides an immediate yield of 2.133%, assuming the stock falls to $22.50 or lower by Oct. 21. If this is repeated over 12 months it's the same as 25.6% annually.

This shows that HESM stock is not only cheap but has good option income plays.

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Mark R. Hake, CFA, does not provide financial advice and you should not rely on my analysis to buy or sell any stock. I am not undertaking to induce you to buy or sell any securities. I am ...

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