Down 14% From Its High, Is Genesis Energy a Buy?

The pipeline stock universe is littered with large-cap companies, many of which are familiar to income investors. So it stands to reason that amid a recent tidal wave of midstream payout increases, some companies go overlooked.

Such is life for Genesis Energy (NYSE: GEL), a small-cap provider of pipeline infrastructure services. The stock is off nearly 14% from its 52-week high, confirming a correction. However, the stock jumped 7% over the past month, perhaps signaling the worst is behind it and momentum is on its side.

This high-dividend stock is in a correction, but it's starting to bounce back. Image source: Getty Images.

Quietly last month, Genesis upped its quarterly distribution to 20 cents per share from 18 cents, a 11.1% boost from the prior quarter. As the company puts it, that's 21.2% year-over-year dividend growth. This energy stock offers a dividend yield of 4.9%, more than 5x the yield of the small-cap Russell 2000 Index.

While Genesis isn't the most popular name in the pipeline space, there's a lot to like here from an income perspective. On an annualized basis, the dividend is now 80 cents a share, representing 33% growth in just two years. Importantly, Genesis recently told investors it had distribution coverage of 3.2x in the second quarter. In plain English, this dividend isn't a strain on the company.

Yes, there is some debt to consider. To be precise, $3.2 billion at the end of the second quarter. Some investors may see that figure, rightfully note that it's well in excess of the company's market capitalization, and then ponder the fate of the dividend.

Those concerns can be allayed on multiple fronts. Genesis is moving to reduce its $3.2 billion in debt -- a smart move considering that figure is well in excess of its $2 billion market capitalization. Additionally, the pipeline infrastructure outfit has no debt maturing this year, next year, or in 2028. It's also using free cash flow to retire preferred stock, thus reducing its dividend obligations.

Combine efforts to firm the balance sheet with dividend growth and the stock's recent strength, and Genesis Energy is a "buy" for risk-tolerant income investors.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.