Marathon Petroleum Corporation: Refining Dividends

| About: Marathon Petroleum (MPC)

Marathon Petroleum Corporation (NYSE:MPC) was spun off from Marathon Corp. (NYSE:MRO) in 2011. The spin off occurred on June 30, 2011 with shareholders of MRO receiving one share of MPC for every two shares of MRO that they owned. MPC is focused on the downstream oil segment with refining and marketing, retail marketing and transportation operations. More recently, in July 2012, Speedway LLC, a wholly owned subsidiary of MPC, acquired 10 convenience stores. In May 2012, Speedway LLC acquired 87 convenience stores in the Midwest. Speedway LLC had previously acquired 23 stores in May of 2011, also in the Midwest. These acquisitions continue to expand its presence in the retail segment as part of a broader expansion strategy.

MPC had about $78.6 billion in revenue in 2011. MPC has a market capitalization of $18.9 billion and an enterprise value of $20.1 billion, suggesting almost no leverage. In fact, MPC has $1.9 billion in balance sheet cash and equivalents. MPC has a strong track record of paying dividends. For 2011, its payout ratio to net income was 13% and its payout to operating cash flow was 9%. Common dividends were adjusted upward to estimate a full year of dividends. Two additional payments of $0.20 were included to provide a full year estimate. Total dividends to be paid in 2012 is approximately $360 million, which is still a small portion of the expected net income.

MPC's estimated forward dividend yield is just 2.6% based upon a closing price of $55.75 and the author's projected annual dividend of $1.45. Despite a brief history as a public company, MPC has established a strong track record of dividend growth. The following table shows the estimated forward quarterly dividends as well as the recent historical quarterly dividends.

Historical and Projected Quarterly Dividends
Type Ex-Dividend Date Quarterly Dividend ($ per share) Change on prior year
Projected 11/14/2013 0.400 14.3%
Projected 8/14/2013 0.400 14.3%
Projected 5/14/2013 0.350 40.0%
Projected 2/14/2013 0.350 40.0%
Projected 11/14/2012 0.350 40.0%
Historical 8/14/2012 0.350 75.0%
Historical 5/14/2012 0.250 NA
Historical 2/14/2012 0.250 NA
Historical 11/14/2011 0.250 NA
Historical 8/15/2011 0.200 NA

Source: Author estimates, Yahoo!Finance

This table shows that MPC has been off to quick start providing a dividend and then raising it, and then raising it again after three payments. The total increase is 75% from $0.20 to $0.35 per share per quarter. One would expect another increase after four payments of $0.35, but possibly MPC will surprise with an earlier increase, especially given the low current payout ratios. Estimates for 2013 EPS are in the range of $6.58 to $10.91, requiring in the worst case a payout ratio of 23% to deliver the estimated $1.50 for 2013. These figures suggest that the strong dividend growth could continue, my forward estimate of $1.45 might even prove to be low, creating additional upside.

In addition to a reasonable dividend, MPC has an ambitious share repurchase program. In February 2012, the board had authorized a program of up to $2.0 billion worth of shares. In the first half of 2012, $850 million of common stock was repurchased at an average price of $42.16, 24% below the recent closing price.

MPC organizes itself into three core segments: 1. Refining and Marketing 2. Pipeline Transportation and 3. Speedway. The bulk of the assets are located in the Refining and Marketing segment. Furthermore, the bulk of the financial performance comes from the refining and marketing segment. The following table shows the second quarter 2012 results by segment:

Q2 2012 Segment Metrics ($ Millions)
Segment Revenue Income before Tax Margin Capital Expenditures
Refining and Marketing 18,805 1,325 7.0% 178
Speedway LLC 3,633 107 2.9% 187
Pipeline Transportation 109 50 45.9% 60
Other* (2,302) (192) NA 56
Total 20,245 1,290 6.4% 481

Source: SEC Filings *Other includes intersegment eliminations and corporate level activities.

This clearly shows that the business is driven by the core refining and marketing activities; however, MPC investment allocation shows the drive to grow the other segments. Time will tell whether this is the right path forward.

Having looked at several other downstream oil companies in a previous article, I see some potential for MPC for dividend investors. It has a relatively high price to book multiple (1.8x) but comparable forward P/E ratio (6.9x). However, while its yield is above the market average, there are many industries that offer higher yields. As a dividend investor, one would have to be first interested in this industry and then seeking interesting opportunities. The upside is that it appears to have reasonable growth potential given the low payout ratios. However, additional research and analysis would be critical prior to making any investment decision. In particular, one would want to build a better understanding of the positioning of its refineries - spreads and performance - as well as build a better understanding of its retail expansion plans. It seems like a questionable growth area given its low margins.

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.

Additional disclosure: Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.

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