614% Dividend Increase From an Energy Stock?
Top Dividend Growth Stock You Likely Haven’t Considered
Over the past several years, oil prices have been volatile, to say the least. But that didn’t prevent this energy stock from consistently raising its payout to income investors.
I’m looking at Magellan Midstream Partners, L.P. (NYSE:MMP), a master limited partnership (MLP) based in Tulsa, Oklahoma.
Magellan Midstream Partners used to be a part of Williams Companies Inc (NYSE:WMB), but was spun off and started trading as Williams Energy Partners in 2001. Then, in 2003, the partnership changed its name to the current one and began trading under the ticker symbol MMP.
To dividend investors, MMP stock stands out due to its generous distribution policy.
Paying quarterly distributions of $0.9375 per unit, Magellan Midstream Partners offers an annual yield of 5.4%.
The payout has been growing, too. When the partnership first went public in 2001, it had an annualized distribution rate of $0.525 per unit. Today, the amount stands at $3.75 per unit, representing a total increase of 614%. (Source: “Cash Distributions,” Magellan Midstream Partners, L.P., last accessed June 1, 2018.)
Moreover, since 2010, the partnership has been raising its payout every single quarter.
Just think about that for a second. Oil and gas prices plunged dramatically in the summer of 2014. But even during those hard times, this energy stock was still raising its distributions to investors every three months.
The reason why MMP stock can deliver such impressive distribution growth, despite commodity price headwinds, lies in the company’s rock-solid business.
You see, Magellan Midstream Partners does not drill any new wells. Instead, it provides midstream services to companies in the energy sector.
A Rock-Solid Business
Magellan Midstream Partners has three main segments: “Refined Products,” “Crude Oil,” and “Marine Storage.”
Refined Products is currently the biggest segment, responsible for generating nearly 60% of the partnership’s operating margin last year. The segment consists of 9,700 miles of pipelines that primarily transport gasoline and diesel fuel. The pipeline system also comes with 53 terminals and 44 million barrels of storage capacity. Profit in this segment is driven by throughput volume and tariffs. (Source: “MLP and Energy Infrastructure Conference,” Magellan Midstream Partners, L.P., May 23, 2018.)
In the Crude Oil segment, MMP operates 2,200 miles of crude oil pipelines and 28 million barrels of total crude oil storage. Most of the business in the segment is backed by long-term throughput commitments.
In the Marine Storage segment, Magellan Midstream Partners has five storage facilities with 26 million barrels of storage capacity and 1.4 million barrels per day of dock capacity. Historically, the segment has achieved utilization rates of more than 90%.
According to its latest investor presentation, management expects 85% of MMP’s future operating margin to come from fee-based, low-risk activities.
By running a fee-based business, the partnership is well positioned to generate stable cash flows through commodity price cycles.
Here’s the neat part. While oil prices are still far from making a full recovery, Magellan Midstream Partners has already delivered some serious growth in its financials.
Last year, the partnership generated a net income of $869.5 million, representing an 8.3% increase year-over-year. Growth was driven by strong demand for refined products and crude oil transportation services, and also by contributions from the partnership’s growth projects. (Source: “Magellan Midstream Reports Higher Financial Results for Fourth-Quarter 2017,” Magellan Midstream Partners, L.P., February 1, 2018.)
Like most MLPs, Magellan Midstream Partners also reports something called distributable cash flow, which measures the amount of cash generated during the reporting period that is available to pay distributions.
In 2017, the company’s distributable cash flow came in at a record $1.0 billion. This was 25% more than the partnership’s actual cash distribution for the year.
In the first quarter of 2018, MMP’s financials were equally impressive. For the quarter, the partnership generated $258.9 million of distributable cash flow, which represented a 13.8% increase from the first quarter of 2017. (Source: “Magellan Midstream Reports First-Quarter 2018 Financial Results,” Magellan Midstream Partners, L.P., May 3, 2018.)
Higher Distributions Ahead
And the best could be yet to come. During Magellan Midstream Partners’ first-quarter earnings call, management increased their guidance.
For full-year 2018, the partnership is adding $30.0 million to its initial annual distributable cash flow guidance, for a total of $1.1 billion. This would result in a distribution coverage ratio of 1.2 times, leaving a wide margin of safety. Moreover, the ratio already takes into account the partnership’s projected eight percent distribution growth rate for 2018.
Looking further ahead, Magellan Midstream Partners is targeting annual distributable cash flow growth of between five percent and eight percent for 2019 and 2020.
The partnership’s management is willing to return cash to investors. By maintaining a coverage ratio of 1.2 times, MMP’s growing cash flow could result in annual cash distribution growth of five to eight percent for the next two years as well.
For dividend growth investors, Magellan Midstream Partners, L.P. deserves a serious look.