Winner in the Pipeline: Under the Radar

DALLAS (TheStreet) -- You usually can't invest in one part of a company and not another. Investors are forced to accept less-appealing divisions along with the star performers.

But that's not the case with Holly Corp.(HOC Quote). The Dallas-based oil company's consolidated subsidiary, Holly Energy Partners(HEP Quote), is publicly traded, and pays a fat dividend and is extremely profitable.

Holly Energy Partners operates crude-oil pipelines, storage tanks and distribution terminals in West Texas, Utah, Arizona and New Mexico. While the company doesn't have a diversified client base, Holly Corp., Alon(ALJ Quote) and BP(BP Quote) account for 66%, 24% and 3% of sales, respectively, giving Holly Energy Partners a wide operating margin of over 40%, more than twice the industry average.

Holly Energy Partners beat analysts' earnings estimates in the third quarter, justifying a jump in the stock price over the past year. Holly Energy Partners has easily exceeded the S&P 500 Index, with share-price appreciation of 33% and a return of 50% when dividend reinvestments are included. Holly Energy Partners looks to be a hotshot in the economic recovery. Closer inspection of the balance sheet, however, may lead to some big questions.

Almost all of the company's financing comes from long-term debt. With only a thin strip of equity, Holly Energy Partners appears very vulnerable. Compounding those fears is the dividend payout ratio of more than 100%, meaning the company is paying more in dividends than earnings per share can cover. Under normal circumstances, that would quickly destroy a company's finances, as it would have to pay for dividends with debt financing.