Oil stocks have been among the hardest-hit in the entire market over the course of 2020. The coronavirus pandemic wreaked havoc on global oil demand, while weak pricing had already been a challenge for the industry coming into 2020.

The result is that many oil stocks are sporting elevated dividend yields, making them attractive for income investors. For example, Marathon Petroleum (MPC) yields over 7%. Such a high yield makes the stock attractive for individual investors, as well as major asset managers such as Elliot Management.

Oil stocks are not without risks, but for investors not afraid to take an elevated level of risk, MPC could be an undervalued dividend stock.

Business Overview

Marathon Petroleum Corp. was spun off from Marathon Oil Corp. (MRO) in 2011. Marathon Petroleum is the largest refiner in the United States, after the 2018 buyout of Andeavor Logistics. Marathon Petroleum has a large and diversified portfolio of assets, including 16 refineries and a refining capacity of 3.1 million barrels per day. It also has a marketing system that includes approximately 6,800 branded locations, including 3,900 convenience stores.

Marathon Petroleum also owns MPLX (MPLX), a midstream MLP that operates oil storage and transportation assets. Marathon Petroleum Corp. has a market cap of $20 billion. The company reported third-quarter financial results that beat on the bottom line, but missed on the top line. For the quarter, revenue of $17.5 billion missed analyst estimates by $530 million, representing a 37% year-over-year decline as the coronavirus pandemic took a huge bite out of demand for refined products.

On the other hand, Marathon Petroleum reported an adjusted loss of $1.00 per share, much better than the loss of $1.74 analysts had been expecting. Another important data point, refining and marketing margins, came in stronger than expectations as well. Refining and marketing margin of $8.28 per barrel was significantly higher than the consensus estimate of $6.51. Marathon Petroleum’s outperformance on EPS and R&M margin is a positive indicator of management’s ability to cut costs and elevate profitability during an extremely difficult period.

Dividend Analysis

Marathon Petroleum currently pays a quarterly dividend of $0.58 per share, which equals an annualized dividend payout of $2.32 per share. The stock has a current yield of 7.4% as a result, an extremely high yield considering the broader S&P 500 Index yields less than 2% on average right now. However, stocks with elevated dividend yields often come with higher risk, and Marathon Petroleum is no different.

The coronavirus pandemic has had a very negative impact on oil refiners, and while the U.S. economy has notched a steady recovery in the past few months, the future outlook remains uncertain. Therefore, investors should note the elevated risk before buying Marathon Petroleum.

The company’s balance sheet is in decent shape, with a trailing debt-to-adjusted-EBITDA ratio of 4.5x as of the most recent quarter. This is a bit on the high side, so investors will need to closely monitor the company’s progress in its debt repayment in the coming quarters.

Final Thoughts

Oil refiners have been hit extremely hard in 2020, due to the coronavirus pandemic. Refiners such as Marathon Petroleum need to see a sustained recovery in demand for refined products going forward, if its turnaround is to be successful. For investors anticipated a continued recovery in the U.S. economy and the oil industry, Marathon Petroleum’s 7.4% yield is extremely attractive, albeit with an elevated level of risk.