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Pipeline transport master limited partnership company Magellan Midstream Partners L.P. (NYSE:MMP) sits squarely on the financially conservative end of the MLP spectrum, yet still offers investors a distributions income stream projected to grow by 10% per year. To torture a metaphor, MMP would be a good choice for investors who want to stick a toe in the MLP growing distributions waters.

Note: MLP companies such as Magellan Midstream Partners have units and pay distributions. The words stock, shares and dividends may be used here with the understanding that the rules of MLP units apply including the tax consequences of investing in MLP units.

Business Overview

The primary business of Magellan Midstream Partners is the pipeline transport of refined petroleum products such as gasoline and diesel fuel. The company owns the nation's longest - 9,600 miles - products pipeline system, with 49 attached terminals. The pipeline system covers the central section of the U.S. with corners at El Paso and Houston, Chicago, and Grand Forks North Dakota. Magellan Midstream owns an additional 27 non-attached storage terminals. The refined products division revenues are primarily fee based with tariff rates tied by regulation to the Producer Price Index. The refined products division accounted for 75% of operating margin in 2012.

The marine storage division owns five coastal facilities with a total of 26 million barrels storage. 3.5 Revenues come from lease fees with a greater than 90% utilization rate. Marine storage brought in 13% of operating margin in 2012.

Crude oil pipelines from the production areas to storage and refining locations is the growth division for Magellan Midstream Partners. The division accounted for 12% of operating margin last year, but is slated to receive 75% of the growth capital spending for this year and next.

Financial Strengths

Magellan Midstream offers an attractive list of attributes for the investor looking for a financially secure dividend paying investment.

  • MMP is one of the 10 largest MLP companies with a current market cap of $11.9 billion and an enterprise value of over $14 billion.
  • The company has an investment grade credit rating.
  • Including the revenue from projects coming on line in the second an third quarter, MMP has a debt to EBITDA ratio of less than 3.0. This is in the MLP sector where debt is more often north of 3.5 times EBITDA and aggressive companies will go over 4.0.
  • Magellan Midstream pays no incentive distribution rights, which allows the company to provide a larger increase in the distribution to limited partner units for a certain amount of distributable cash flow gain than a partnership which must pay a portion of the DCF to the general partner as IDRs.
  • Product pipeline tariffs are regulated by the feds and include built in increases each year, eliminating a loss of revenue due to competitive pricing.
  • Magellan Midstream Partners has increased the annual dividend total every year since going public in 2001 and has increased the payout from the previous quarter 44 out of 48 quarters since the IPO.

Growth Potential and Dividends

For the rest of this year - 2013 - the primary growth driver will be the company's Longhorn crude oil pipeline reaching its full capacity of 225,000 bpd. In the first quarter the pipeline was up to 50,000 bpd. This pipeline brings crude from the West Texas Permian Basin to refinery rich Houston.

In February, Magellan Midstream announced the pending purchase of 800 miles of product pipelines from Plains All American Pipeline L.P. (NYSE:PAA). A 250 mile segment of pipeline will allow the transport of product through El Paso to Albuquerque. The 550 mile portion connects Colorado, South Dakota and Wyoming and includes 4 storage terminals. Closing of the purchase is subject to regulatory authority, but will be immediately accretive to DCF with built-in, low-cost growth prospects.

Magellan Midstream Partners management has provided guidance that the dividend rate will increase by at least 10% each year for 2013 and 2014 over the previous year. The current dividend yield based on the 2013 first quarter distribution is 3.9%. The company wants to hang on to at least $75 million of DCF compared to the total distributions providing at least a 1.1 to 1 coverage ratio. You may be able to find other MLP stocks with similar distribution growth rates and higher yields, but few will match the financial strength of MMP, allowing you to sleep at night and potentially pick up a little more than a 10% dividend increase.

MMP Chart

MMP data by YCharts

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Worried About The Safety Of Dividends? Consider Magellan Midstream Partners For Safety And Dividend Growth