Late in 2021, Safety Net slapped Orchid Island Capital (NYSE: ORC) with an “F” for poor dividend safety…

And sure enough, Orchid cut the dividend right out of the gate in 2022.

So be on the lookout and stay safe this year…

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– Kyle Wehrle, Assistant Managing Editor

In April 2021, I said there was moderate risk to fuel company Sunoco LP‘s (NYSE: SUN) distribution.

There were two main issues at the time. Sunoco’s cash available for distribution (CAD), a measure of cash flow for master limited partnerships (MLPs), was expected to plummet from $517 million to $453 million in 2021. We here at Safety Net global headquarters do not like to see declining cash flow.

The other concern was Sunoco’s high level of debt. Sunoco’s debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio was 5.8. However, the fuel distributor was expected to pay down debt in 2021.

As it turned out, Sunoco blew away Wall Street’s CAD expectations. Instead of seeing a 12% decline to $453 million, Sunoco actually grew CAD by nearly 5% to $542 million.

This year, however, CAD is projected to fall back to $517 million.

For more context, Sunoco distributes gasoline to 10,000 gas stations and convenience stores across 40 states and territories.

Sunoco is forecast to pay $357 million in distributions in 2022 (MLPs pay distributions, not dividends). Those distributions should easily be covered by the $517 million in expected CAD for 2022.

The expected distribution is the same as last year’s. Sunoco pays a quarterly distribution of $0.8255 per unit (MLPs have units, not shares), which comes out to $3.302 annually for an 8% yield.

Last year, management said it was going to pay down debt. It didn’t do that. At the end of 2020, long-term debt stood at $3.1 billion. By the end of December 2021, debt had inched up to $3.2 billion.

What did decline, however, was the debt-to-EBITDA ratio. But this was because earnings went higher, not because debt was reduced. Debt-to-EBITDA stands at 4. That’s better than the 5.8 reading from 2021 but still too high.

Sunoco began paying a distribution in 2014. It has never reduced the payout, but it hasn’t increased it since 2016 either.

Near term, there seems to be little risk of Sunoco cutting its distribution. However, if debt remains high and if the company’s CAD heads lower and that becomes a trend, the distribution could be at risk in the longer term.

Dividend Safety Rating: C