Earn a 5.3% Yield Today and Get a Payout Increase Every Quarter
In an era where the average S&P 500 company pays less than two percent, a 5.3% dividend yield already makes Magellan Midstream Partners, L.P. (NYSE:MMP) stand out. What’s even more impressive is that the partnership also delivers payout increases like clockwork.
You see, at most dividend-paying companies, management would be proud to raise their dividend once a year. But at Magellan Midstream Partners, the board of directors doesn’t seem to be content with annual payout increases. That’s why since 2010, the partnership has raised its cash distribution every single quarter. (Source: “Cash Distributions,” Magellan Midstream Partners, L.P., last accessed July 31, 2018.)
And if you look at bit further back, you would see that since MMP stock’s initial public offering in 2001, it has announced a total of 65 distribution hikes. During this period, the partnership’s annualized payout has increased by a staggering 630%.
Now, keep in mind that Magellan Midstream Partners comes from the energy sector. Over the last several years, the sector wasn’t really in the best of shape. Due to the massive downturn in commodity prices, many oil and gas companies had to cut back their production. Layoffs were common, and so were dividend cuts. But even with these strong headwinds, Magellan Midstream Partners was still delivering payout increases to its shareholders every three months.
So how did the partnership achieve such an impressive distribution growth history? Well, the answer lies in the nature of its business.
Magellan Midstream Partners, L.P.: Business Overview
Headquartered in Tulsa, Oklahoma, Magellan Midstream Partners, L.P. is a master limited partnership (MLP). Although MMP is considered an energy stock, it does not have any exploration or production business. Instead, the partnership provides crude oil and refined petroleum products transportation and storage services.
Today, Magellan Midstream Partners owns and operates the longest refined products pipeline system in the U.S. With a total of 9,700 miles, the system reaches nearly 50% of the country’s refining capacity. At the same time, MMP also owns 2,200 miles of crude oil pipelines. (Source: “J.P. Morgan Energy Conference,” Magellan Midstream Partners, L.P., last accessed July 31, 2018.)
Furthermore, Magellan Midstream Partners’ portfolio consists of crude oil and refined products storage assets with an aggregate storage capacity of more than 100 million barrels. In other words, the partnership earns a fee by providing transportation and storage services to companies in the energy industry. And because MMP does not drill new wells, it does not have to worry too much about the price of oil.
As you can see from the chart below, Magellan Midstream Partners earned a substantial portion of its operating margin last year from transportation, storage, and other fee-based services segments. Commodity-related activities, which tend to be riskier, only accounted for nine percent of its 2017 operating margin.
2017 Operating Margin
(Source: Ibid.)
Going forward, management expects fee-based, low-risk activities to contribute to over 85% of the partnership’s operating margin.
Growing Cash Flows
Of course, no matter how wonderful a business sounds like, it has to generate enough cash to cover its dividends. In the case of master limited partnerships, a key performance metric is distributable cash flow.
The good news is that at Magellan, the partnership’s distributable cash flow has been growing just as fast as its payout. In 2017, MMP’s distributable cash flow grew 7.8% year-over-year to a record $10.2 billion. The amount was 25% more than what was needed to cover its actual cash distributions for the year. (Source: “Magellan Midstream Reports Higher Financial Results for Fourth-Quarter 2017,” Magellan Midstream Partners, L.P., February 1, 2018.)
In the first quarter of 2018, Magellan Midstream Partners generated $258.9 million in distributable cash flow, which represented another 13.8% increase year-over-year. (Source: “Magellan Midstream Reports First Quarter 2018 Financial Results,” Magellan Midstream Partners, L.P., May 3, 2018.)
Management also raised their guidance. For full-year 2018, they expect Magellan Midstream Partners to earn $1.08 billion in distributable cash flow, which would mark a new record for the partnership.
Moreover, management plans to increase MMP stock’s annual cash distribution by eight percent this year. And even with the expected dividend hike, MMP’s projected distributable cash flow would provide 1.2 times coverage of its payout. In other words, the distributions should be more than safe.
For 2019 and 2020, management is targeting cash distribution growth of between five percent and eight percent annually. The partnership is expected to maintain a 1.2-times distribution coverage ratio.
Get Ready for More Distribution Increases
Usually, investors have to choose between current yield and growth potential. But because Magellan Midstream Partners, L.P. comes from the beaten-down energy sector, most people have never heard of it. That means this hidden dividend-paying gem can still offer a quite substantial yield.
Trading at $71.88 per unit, the partnership offers investors an annual yield of 5.3%.
And based on its growing business and strong distribution coverage, investors can continue to expect quarterly payout increases.