A High-Yield Stock Investors Can Count on
To retirement investors, dividend safety is of utmost importance. And that’s why I usually say, if you’re looking for stocks to add to your retirement portfolio, don’t go for the highest yielders. In the current low-yield environment, the highest-yielding stocks are more often associated with dividend cuts than dividend increases.
But you might want to make an exception for Magellan Midstream Partners, L.P. (NYSE:MMP), which provides a jaw-dropping yield of 8.3% at the time of this writing.
Magellan comes from the energy sector. While it may not be as famous as the oil and gas supermajors, it’s a name to be reckoned with in the business.
In particular, the partnership owns the longest refined petroleum products pipeline system in the U.S., reaching nearly 50% of the country’s refining capacity. At the same time, Magellan Midstream Partners, L.P. has the capacity to store more than 100 million barrels of petroleum products, such as gasoline, diesel fuel, and crude oil.
As mentioned above, the No. 1 reason why retirement investors might want to stay away from ultra-high yielders is dividend safety, or more precisely, the lack of it.
MMP stock is an ultra-high yielder, and its energy-sector background doesn’t exactly boost its appeal in this regard. Given the volatile commodity-price environment, dividends from energy stocks are rarely carved in stone.
And yet, since Magellan came into existence in February 2001—back when it went by the name of Williams Energy Partners—the partnership has never cut back its payout.
In fact, Magellan Midstream Partners stock has delivered not only a reliable distribution, but an increasing one. When the partnership was formed, it had an annualized distribution rate of $0.525 per unit. Today, the amount stands at $4.11 per unit. That’s an increase of 683%! (Source: “Cash Distributions,” Magellan Midstream Partners, L.P., last accessed June 4, 2021.)
One of the reasons behind Magellan’s track record is its focus on fee-based, low-risk activities. Last year, commodity-related activities only accounted for eight percent of the partnership’s operating margin. Management expects Magellan’s fee-based operations to contribute at least 85% to its operating margin going forward. (Source: “Overview of Magellan Midstream: May 2021,” Magellan Midstream Partners, L.P., last accessed June 4, 2021.)
Looking at the financials, we see that Magellan generated distributable cash flow of $1.04 billion in full-year 2020, which was 1.1 times the amount needed to pay distributions to unitholders for the year. Note that MMP stock actually paid a higher distribution in 2020 than in 2019. The fact that the partnership managed to do so in such a challenging year for the sector—and cover its payout—is a testament to its resilience. (Source: “Magellan Midstream Reports Fourth-Quarter 2020 Financial Results,” Magellan Midstream Partners, L.P., February 2, 2021.)
Better yet, management had just raised their guidance. Previously, they expected the partnership to generate $1.02 billion in distributable cash flow in 2021, which would translate to a distribution coverage ratio of 1.1. Now they expect $1.07 billion in distributable cash flow and a coverage ratio of 1.2 for the year. (Source: “Magellan Midstream Reports First-Quarter 2021 Financial Results and Raises 2021 Annual Guidance,” Magellan Midstream Partners, L.P., April 29, 2021.)
Other than offering very generous cash distributions, Magellan stock has the prospect of returning cash to investors through equity repurchases.
In its latest earnings release, the partnership said, “Magellan currently has $473 million available under its $750 million repurchase program authorized through 2022. While no equity was repurchased during first quarter 2021, the remaining forecasted 2021 annual [free cash flow] after distributions, which now includes the $270 million proceeds from the recent Pasadena sale, could be used to opportunistically repurchase units.” (Source: Ibid.)
Repurchasing units would reduce the number of units outstanding, thus allowing each remaining Magellan unitholder to own a larger portion of the partnership. While the timing, price, and actual number of any unit repurchase will depend on multiple factors and is at the discretion of management, the fact that the energy company is looking at this option in these times shows its willingness to return cash to investors.
Bottom Line on Magellan Midstream Partners, L.P.
In most cases in today’s market, a yield above eight percent would seem too good to be true. But in the case of Magellan, the partnership has a solid business and strong financials, and it has demonstrated the ability to pay steady or increasing distributions for two decades.
That’s why, even though it’s an ultra-high yielder, MMP stock deserves the attention of retirement investors.