Magellan Midstream Partners, L.P.: The Best 10% Yielder on the Market?
Take a Good Look at This High-Yield Stock
The upward momentum in the U.S. stock market might be strong, but not every ticker has been shooting through the roof. In fact, even after the post-election rally—which was boosted by positive news about COVID-19 vaccines—there are plenty of stocks that have yet to make a full recovery from the pandemic-induced sell-off earlier this year.
And because of the inverse relationship between dividend yield and stock price, you can still find plenty of high-yield stocks trading near the floor.
The big problem, of course, is that high-yielders are generally not the safest bets. If you take a look at the double-digit yielders, you’ll see that many of them have cut back their dividends this year.
This should not come as a surprise. With the sheer size of the economic impact from the COVID-19 pandemic, many industries are still deep in the doldrums.
And that, my dear reader, is why Magellan Midstream Partners, L.P. (NYSE:MMP) could be an opportunity.
Magellan Midstream is a master limited partnership (MLP) headquartered in Tulsa, OK. As its name suggests, the company operates in the midstream energy industry.
In particular, the partnership owns the longest refined petroleum products pipeline system in the U.S., totaling approximately 9,800 miles. The system has access to nearly 50% of the nation’s refining capacity and it can also store more than 100 million barrels of petroleum products, such as crude oil, gasoline, and diesel fuel. (Source: “Barclays CEO Energy-Power Conference,” Magellan Midstream Partners, L.P., September 9, 2020.)
Now, we know that energy is one of the beaten-down industries this year, so, unsurprisingly, MMP stock is not exactly hot right now. But with the inverse relationship between stock price and dividend yield I mentioned earlier, Magellan Midstream is now a double-digit yielder.
Trading around $40.50 per unit at the time of this writing, Magellan Midstream Partners stock offers investors an annual distribution yield of 10.1%.
Here’s the neat part: unlike some of the other double-digit yielders, Magellan Midstream did not reduce its payout, despite the industry-wide downturn related to the pandemic. For the third quarter of 2020, the partnership paid a cash distribution of $1.0275 per unit, which is the exact same amount it was paying at the beginning of this year (and above the amount paid for the year-ago period).
As a matter of fact, prior to the unexpected event—the pandemic—Magellan Midstream was delivering quarterly distribution hikes to its investors. Since the partnership went public in 2001, its annualized cash distribution per unit has increased by a staggering 683%. (Source: “Cash Distributions,” Magellan Midstream Partners, L.P., last accessed November 24, 2020.)
Note that, while the energy sector has had quite a few ups and downs since 2001, Magellan Midstream has never cut back its payout.
And I don’t expect this time to be an exception. The MLP runs a largely fee-based business, with its low-risk fee-based activities expected to contribute more than 85% of its future operating margin. The partnership is also one of the highest-rated operators in the midstream energy segment, with significant liquidity and a strong investment-grade balance sheet.
Of course, that doesn’t mean Magellan’s business is immune to impacts from the pandemic. In the third quarter of 2020, the partnership’s distributable cash flow, a critical measure of an MLP’s operating performance, came in at $258.8 million. The amount was substantially lower than the $306.8 million it generated a year ago. (Source: “Magellan Midstream Reports Third-Quarter 2020 Financial Results,” Magellan Midstream Partners, L.P., October 30, 2020.)
Still, the partnership expects to achieve a distribution coverage of approximately 1.1 times in full-year 2020, which would result in excess cash flow of more than $100.0 million.
Looking further ahead, Magellan Midstream’s chairman, president, and chief executive officer, Michael Mears said, “Although we do not plan to provide guidance specific to 2021 at this point, which follows our historical approach, we do currently intend to target cash distributions for 2021 consistent with our current payout level.” (Source: “Magellan Midstream Partners LP (MMP) CEO Michael Mears on Q3 2020 Results – Earnings Call Transcript,” Seeking Alpha, October 30, 2020.)
He added, “We understand that surety of distribution is important to a significant number of our investors and believe the current payout is sustainable next year.”
Bottom Line on Magellan Midstream Partners, L.P.
In the volatile energy sector, nothing is carved in stone.
But because of Magellan Midstream Partners, L.P.’s solid, oversized distributions—that should be safe for the near future, at least—MMP stock could be one of the best high-yield opportunities in today’s market.