Looking for Oversized Dividends? Read This:
In the current low-yield environment, a stock that pays 10% in dividends may seem too good to be true. But if you’re willing to look beyond the hottest tickers, it’s actually possible to find solid businesses with oversized payouts.
Check out Magellan Midstream Partners, L.P. (NYSE:MMP), for instance. Because of the commodity price downturn over the past year, energy stocks like MMP stock haven’t been investor favorites. And yet, Magellan Midstream Partners stock has one of the most generous distribution policies in the entire market.
Allow me to explain.
Headquartered in Tulsa, OK, Magellan Midstream Partners operates in the midstream energy sector. It used to be a part of Williams Companies Inc (NYSE:WMB) and was spun off as Williams Energy Partners L.P. in February 2001. The partnership changed its name to the current one in September 2003.
Over the years, Magellan Midstream Partners has made significant asset acquisitions and now has a portfolio consisting of 9,800 miles of refined products pipelines, reaching nearly 50% of America’s total refining capacity. The company also has the capacity to store more than 100 million barrels of petroleum products, such as gasoline, diesel fuel, and crude oil. (Source: “Overview of Magellan Midstream: December 2020,” Magellan Midstream Partners, L.P., last accessed February 8, 2021.)
As a midstream energy stock, MMP stock’s journey over the past year was similar to that of its peers. Magellan Midstream Partners stock tumbled last March then climbed back a bit, but it’s still quite far from making a full recovery.
Magellan Midstream Partners, L.P. (NYSE:MMP) Stock Chart
Chart courtesy of StockCharts.com
Steady Dividends & Solid Financials
Here’s where Magellan Midstream Partners stock stands out: while many of its peers were cutting their dividends, Magellan chose to maintain its payout.
In fact, Magellan Midstream Partners has been one of the most reliable dividend stocks in the midstream energy world. The company paid $4.11 per unit of cash distributions in 2020, which was actually higher than the $4.065 per unit it paid in 2019. And if you look further back, you’ll see that the partnership has increased its annualized distribution per unit by 683% since its initial public offering in 2001. (Source: “Cash Distributions,” Magellan Midstream Partners, L.P., last accessed February 8, 2021.)
Today, Magellan Midstream Partners’ quarterly distribution rate stands at $1.0275 per unit—exactly the same as it was before the COVID-19 pandemic. But because MMP stock is trading at a much lower level than before, its yield has gone up.
At the time of this writing, Magellan Midstream Partners stock offers investors an annual distribution yield of 10.1%.
Of course, given the ongoing pandemic and the commodity price environment, the midstream energy sector is far from being sunshine and rainbows. According to Magellan’s latest earnings report, its operating margin for both refined products and crude oil declined year-over-year in the fourth quarter of 2020. (Source: “Magellan Midstream Reports Fourth-Quarter 2020 Financial Results,” Magellan Midstream Partners, L.P., February 2, 2021.)
Distributable cash flow, a critical performance measure for most midstream partnerships, came in at $269.7 million for the quarter. That represented a substantial decline from the $357.8 million of distributable cash flow that Magellan Midstream Partners generated in the year-ago period.
However, the partnership’s distributable cash flow for full-year 2020 was $1.0 billion, which resulted in a distribution coverage ratio of 1.13 times. In other words, the partnership managed to outearn its payout for the year.
During the company’s fourth-quarter earnings conference call, its chief executive officer, Mike Mears, said, “Magellan intends to maintain our quarterly cash distribution at the current level during 2021. Based on our [discounted cash flow] guidance of $1.02 billion, we expect to generate excess cash of approximately $100 million this year resulting in distribution coverage of 1.1 times for the year.” (Source: “Magellan Midstream Partners, L.P. (MMP) CEO Mike Mears on Q4 2020 Results – Earnings Call Transcript,” Seeking Alpha, February 2, 2021.)
And while the partnership did not provide a detailed guidance beyond 2021, management said they expect Magellan Midstream Partners’ distributable cash flow to improve in the next several years. Moreover, once refined product demand and commodity prices return to more historical levels, the partnership will continue to target a distribution coverage ratio of at least 1.2 times, which would create a margin of safety.
Bottom Line on Magellan Midstream Partners, L.P.
At the end of the day, keep in mind that it may take a while for the energy sector to get back to normal.
But with Magellan Midstream Partners, L.P. committed to pay oversized cash distributions, MMP stock is one of the few double-digit yielders worth considering in today’s market.