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Sunoco LP: Good Dividend Pick But Not Without Risks

Summary

Sunoco has a recession resistant business.

Distributions covered by cash flow, but beware of more debt fueled growth.

The company has a significant amount of variable interest rate debt.

JPMorgan recently called Sunoco LP (NYSE:SUN) a "top defensive pick", and there have been several articles published on Seeking Alpha that recommend the stock. While I largely agree with the authors of those articles that Sunoco is a good company with a sound business, I want to highlight some risks I feel prevent the stock from being a "top defensive pick" like JPMorgan claimed. Again, I want to stress that I think the SA authors did an excellent job covering Sunoco; however, I just want to add some additional color around some of the risks to Sunoco and take a more in-depth look at its balance sheet and future cash flows.

Before we talk about the risks, let's highlight the good aspects of Sunoco.

Sunoco's Good Points

Having been caught in the energy/MLP meltdown, Sunoco is quite obviously very cheap. The stock is down more than 32% over the past year.

The company trades at a P/E of 13.89, well below the market average and sports a 9.66% dividend yield.

Unlike pure energy plays, the company is well diversified. It sells fuel and merchandise at the retail level through its company operated convenience stores as well as sells fuel on a wholesale level to distributors, commercial customers, independent dealers, and other convenience stores.

The retail and wholesale aspects of the company's operation has helped protect it from the secular trend of consumers purchasing motor fuel from large chain stores such as Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST), and various grocery stores. Additionally, the company is benefiting from industry consolidation in the convenience store industry as large integrated oil companies have been divesting their retail operations and small independent dealers are selling or closing.

The company also has low exposure to commodity risk as detailed in its 10-K:

Historically, we have had minimal commodity price risk as we purchased the majority of our motor fuel upon receipt of an order from one of our customers and held title to the motor fuel only for the short period of time...


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