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Growth & Income

Investors looking for solid income amidst the recent market turmoil should consider Holly Energy Partners, L.P. (HEP - Snapshot Report). The partnership pays a distribution that yields a stellar 6.9%. It has increased this distribution a remarkable 27 consecutive quarters dating back to its IPO in 2004.

HEP also recently reported a solid second quarter in which earnings per limited partner unit came in 13% above the Zacks Consensus Estimate. Analysts have been raising their estimates off of the strong quarter, sending the stock to a Zacks #2 Rank (Buy).

Master Limited Partnership

Holly Energy Partners is a master limited partnership (MLP) that operates petroleum product and crude oil pipelines, storage tanks, distribution terminals, and loading rack facilities. As an MLP, it must distribute at least 90% of its income to unitholders to avoid taxation on that money.

It is headquartered in Dallas, Texas and has a market cap of $1.1 billion.

Second Quarter Results

Holly Energy Partners reported second quarter results on July 28. Earnings per limited partner unit came in at 69 cents, well ahead of the Zacks Consensus Estimate of 61 cents. It was a 42% increase over the same quarter in 2010.

Revenue rose 12% year-over-year to $50.9 million, well ahead of the Zacks Consensus Estimate of $48.0 million. The increase was driven by higher refined product pipelines revenue as shipments increased to an average of 142.6 thousand barrels per day compared with 133.3 thousand in the same quarter last year.

Overall pipeline volumes increased a solid 7%.

Operating expenses as a percentage of total revenues declined from 50.6% to 46.4% as the company leveraged its fixed costs. This helped drive a 21% increase in operating income year-over-year.

Outlook

Analysts mostly raised their earnings estimates for both 2011 and 2012 off of the solid quarter, sending the stock to a Zacks #2 Rank (Buy).

Analysts are projecting strong growth for HEP over the next two years. The 2011 Zacks Consensus Estimate is $2.55, representing 20% growth over 2010. The 2012 consensus estimate is currently $2.75, corresponding with 8% earnings growth.

Distribution

On top of this growth, HEP pays a distribution that yields a juicy 6.9%. The partnership has raised it a remarkable 27 consecutive quarters since going public in 2004 at an average annual rate of 7.5%.

HEP: Holly Energy Partners, L.P.

Valuation

The valuation picture looks reasonable for this MLP. It trades at 19.4x 12-month forward earnings, in-line with both the industry average and its 10-year median.

The Bottom Line

HEP provides much needed stability for investors with its solid 6.9% distribution yield. With earnings estimates rising and valuation still reasonable, it just might provide some capital appreciation too.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research.

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