Energy infrastructure companies Targa Resources (NYSE: TRGP) and CorEnergy Infrastructure Trust (NYSE: CORR) both have something that would catch the eye of income-focused investors: a yield north of 8%. One reason both stocks have such elevated payouts is that they trade at relatively cheap prices. CoreEnergy, for example, sells for less than 10 times cash flow, while Targa goes for around 13 times, both below the mid-teens multiple of their peer group.
However, the reason both sell for such low prices is that neither appears to be in the position to increase their payouts anytime soon. For evidence, we need only look at their rather lackluster third-quarter results.
While investors should continue collecting these lucrative dividends, neither company appears to be in a position hand out any more cash. Image source: Getty Images
Still waiting for it to pull the trigger on a deal
CorEnergy Infrastructure Trust's third-quarter results were more of the same. The energy infrastructure-focused REIT said its adjusted funds from operations (AFFO), which measures cash flow available to pay dividends, came in at $11.9 million, or $0.90 per share, for the quarter. While that was more than enough to cover its $0.75-per-share dividend, AFFO was down from the $13 million, or $0.98 per share, the company pulled in during last year's third quarter, which pushed its year-to-date AFFO down 3.6% to $37.7 million. It's tough to justify increasing the payout when cash flow is in decline.
CorEnergy is working to reverse that trend by seeking out acquisitions that would grow its cash flow. The company noted in its earnings release that it's currently evaluating a broad set of opportunities and hopes to make one or two transactions per year, targeting $50 million to $250 million per deal. Furthermore, CorEnergy noted that it ended the quarter with more than $145 million in liquidity to make a deal.
CorEnergy, for its part, has been on the lookout for a deal for quite some, which suggests it hasn't found anything worth buying. This inability to find the right fit makes it less likely that the company will be in a position to boost its payout anytime soon.
Image source: Getty Images.
Way too tight right now
Targa Resources, on the other hand, is at least growing cash flow. The pipeline company reported that distributable cash flow in the third quarter rose 10.9% to $186.6 million, fueled by recently completed growth projects and higher commodity prices. However, that was short of the $196.2 million the company paid out in dividends during the quarter. Targa has therefore had to access the capital market to bridge the gap, as well as finance the $1.32 billion of capital spending it has planned for this year.