MMP Stock: This High Income Stock Has Raised its Payout 590%
Top Dividend Stock to Consider in 2018
For those who don’t follow the energy sector, Magellan Midstream Partners, L.P. (NYSE:MMP) may not sound like a familiar name. But when it comes to providing investors with an increasing stream of income, few companies in today’s stock market can match it.
Consider this: when Magellan completed its initial public offering (IPO) in February 2001, its annualized distribution was $0.525 per unit. Today, the partnership’s annualized distribution rate stands at $3.62 per unit. That’s an increase of 590%. (Source: “Cash Distributions,” Magellan Midstream Partners, L.P., last accessed December 22, 2017.)
Now, it’s true that the energy sector has seen a lot of ups and downs over the years. With that in mind, how on earth can an energy partnership achieve such an amazing track record?
Well, as it turns out, Magellan is not your average energy stock. Instead, it runs a monopoly-like business that can generate steady cash flows through thick and thin. Let me explain.
Headquartered in Tulsa, Oklahoma, Magellan Midstream Partners is in the pipeline business. The partnership owns the longest refined petroleum products pipeline system in the country, totaling 9,700 miles. The system comes with 53 connected terminals—which Magellan also owns and operates—with 42 million barrels of storage capacity.
At the same time, the partnership owns a 1,100-mile ammonia pipeline system, a 2,200-mile crude oil pipeline system, and crude oil storage facilities with an aggregate storage capacity of 26 million barrels.
The neat thing about energy pipelines is that the industry has high barriers to entry. Pipelines are costly to build, and even if you have the money, it’s not easy to get the regulatory approval to start construction.
Furthermore, even when the construction of a pipeline gets approved, the actual construction process can be met with strong protests. Just take a look at the recent Dakota Access Pipeline protests and you’ll see what I mean.
However, once the pipeline is put in place and operating, the cost to maintain it is rather minimal. And because the regulatory authorities would almost never approve the construction of a new pipeline running alongside an existing one, existing pipeline operators are essentially monopolies.
Magellan’s refined products pipeline network has access to nearly 50% of the country’s refining capacity. With low maintenance costs and a virtual monopoly status, the partnership can earn oversized profits.
The business is also quite stable. Unlike the upstream companies, Magellan does not have to worry too much about the price of crude because it’s not drilling new wells. Instead, it earns a fee for letting others use its pipelines and storage terminals. Management expects fee-based, low risk activities to contribute at least 85% to Magellan’s operating margin going forward. (Source: “Wells Fargo Annual Pipeline and MLP Symposium,” Magellan Midstream Partners, L.P., last accessed December 22, 2017.)
The stable, fee-based business model allowed the partnership to pay an increasing amount of distributions despite being in the volatile energy sector. Since its IPO, Magellan has raised its payout 62 times. Since 2010, the partnership has been increasing its per unit distribution rate every single quarter.
Higher Dividends on the Way?
And if you are wondering whether those dividend hikes were a bit too aggressive, a look at Magellan’s financials should be reassuring.
In 2016, the partnership generated a record $947.5 million in distributable cash flow. This was 1.25 times the amount needed to pay distributions for the year, and left approximately $190.0 million of excess cash. (Source: “Magellan Midstream Reports Higher Fourth-Quarter Financial Results,” Magellan Midstream Partners, L.P., February 2, 2017.)
This year, Magellan is on track to achieve its distributable cash flow guidance of $1.02 billion, which would be a new record. The amount would also provide 1.25 times coverage for its cash distributions and leave approximately $200.0 million of excess cash. (Source: “Magellan Midstream Reports Third-Quarter 2017 Financial Results,” Magellan Midstream Partners, L.P., November 2, 2017.)
With well-covered distributions and a large amount of extra cash, Magellan’s payout is more than safe.
And the best could be yet to come. For 2018, management is targeting an eight-percent annual distribution growth rate while maintaining a 1.2 times distribution coverage.
The Bottom Line on MMP Stock
Usually, when a company achieves such an impressive dividend increase track record, investors would rush towards it. But because Magellan comes from the beaten-down energy sector, its unit price did not soar through the roof, meaning the stock can still offer a decent yield.
Trading at around $69.00 apiece, Magellan has an annual distribution yield of 5.2%.
Combining a high current payout, a stable business model, and solid growth potential in distributable cash flow, Magellan Midstream Partners is a top dividend stock for 2018.