Magellan Midstream Partners' Strong Performance Should Continue

Mar.14.12 | About: Magellan Midstream (MMP)

By Carla Pasternak

It's the oldest continual holding within my High-Yield portfolios. I added Magellan Midstream Partners (NYSE: MMP) back in September 2005, nearly seven years ago. During this time, I've earned $17.71 per unit in dividends. Meanwhile, the share price has more than doubled. As of now, I'm sitting on total return of more than 165%. But that's just the start of the story.

This security has also increased its distribution 53% during the time I've held it. This rise has come in the form of 21 distribution increases in the years I've owned it. And while the company's share price didn't escape the bear market unscathed, it did hold up better than the rest of the market. In fact, when the S&P 500 hit its lowest point in March 2009, this security was already well off its lows and setting up for its rebound. Since the market low, the units are up 180%.

I don't think there is such as thing as a "perfect" income security, but I can tell you that Magellan ranks highly on the list of features that make a great income investment. That's why I've held it so long.

Magellan is a master limited partnership (MLP) that owns pipelines and storage facilities across the United States that are used to ship and store refined products like gasoline, diesel, and jet fuel. In fact, the partnership's 9,600-mile refined products pipeline accesses more than 40% of the nation's refinery volumes, connecting refineries in the Gulf of Mexico to industrial markets in the Midwest.

Distributions are secured by stable fee-based businesses that account for around 85% of operating margins (profits before depreciation and amortization, and general and administrative costs). The partnership is paid by volume handled in its pipelines, storage facilities and terminals. Less than 15% of operating margins are tied to volatile commodity prices. That makes for steady cash flow and distributions.

When I added the shares in 2005, I was drawn to Magellan's history of increasing distributions. As I said back then,

Its dividends have increased each and every quarter for the past 18 quarters since it started paying dividends in April 2001. MMP's payouts are now 77% higher than they were four years ago.

And since then, the partnership has continued to shower its investors with distribution increases, making it an easy choice to continue holding.

The partnership has not missed a distribution since initiating payouts in 2001. In fact, payments have increased every quarter, except for during the financial crisis when they remained stable. Since going public, distributions have increased 210%. Today the trust pays out $3.26 per unit each year for a yield of 4.5%.

So how much longer do I plan to hold the shares? That's difficult to say as I am constantly evaluating my High-Yield Investing positions. In 2011, the company generated record results, and looking ahead, management projects another record year in 2012 as expansion projects come online.

If history is any guide and corporate guidance can be taken at face value, then Magellan Midstream Partners should continue to be a strong performer and provide investors a growing income stream. The units are trading at their highest ever price levels, and new investors may wish to wait for a pullback. But given management's upbeat outlook and promised distribution hikes, this outperformance could continue for a while.

Disclosure: Carla Pasternak does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of MMP in one or more if its “real money” portfolios.