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Magellan Midstream Partners: The Operating Fundamentals Remain Stable

Kody's Dividends profile picture
Kody's Dividends


  • Magellan Midstream Partners delivered yet another distribution increase, marking the 71st consecutive quarterly distribution increase.
  • Fueling Magellan Midstream Partners' continuation of steady distribution increases was a 2019 that saw a 17% surge in DCF compared to 2018.
  • Magellan Midstream Partners is also trading at a 24% discount to fair value based upon valuation metrics sourced from I Prefer Income, as well as my inputs into the DDM.
  • Magellan Midstream Partners' 7.9% yield and 3.0-4.0% annual DCF growth alone would be enough to meet my 10% annual total return requirement, without even considering the 2.8% annual valuation multiple expansion.

Image Source: I Prefer Income & I Prefer Income Filter

As recent and long-time readers of mine alike have noticed, a portion of my portfolio is allocated to the midstream industry.

Given that there are a number of well managed companies in this maligned industry trading at attractive valuations, this should come as no surprise.

Using I Prefer Income's filter above where I specify for a yield of greater than 7%, DCF growth of greater than 3%, distribution growth of greater than 3%, and a payout ratio of less than 80%, I was able to narrow the field of potential midstream investments from 66 to 4.

Since I recently reexamined Enterprise Products Partners (EPD), I will be focusing on its midstream blue-chip peer, Magellan Midstream Partners (NYSE:MMP). I last covered the company in December by reviewing the company's DCF payout ratios/distribution growth potential, discussing Magellan's operating fundamentals and risks, and comparing Magellan's fair value against its current stock price.

The Distribution Remains Safe With Long-Term Mid-Single Digit Growth Potential

As the investing expression goes, the safest dividend/distribution is the one that has just been raised. While I believe this is generally true and Magellan recently raised its quarterly distribution by 0.7% from $1.0200/unit to $1.0275/unit, I also think it's prudent for investors to look beyond recent distribution increases by examining a midstream company's DCF coverage ratios to determine whether a distribution is well covered and continued distribution increases are sustainable.

Magellan reported that it generated $1.297 billion in DCF during FY 2019 against $922 million in distributions paid during that time (according to page 68 of Magellan's 2019 Annual Report), for a relatively safe DCF coverage ratio of 1.41.

Although Magellan does expect DCF to decline a bit in FY 2020 as a result of an assumed less favorable commodity

This article was written by

Kody's Dividends profile picture
Hi, my name is Kody. I run Kody's Dividends. As you might guess, this is a blog primarily documenting my journey towards financial independence using dividend growth investing as the means to transform the dream of financial independence into a reality.I am forever indebted to this community because it helped me transition from simply being an investor to being an analyst for The Motley Fool back in June 2021 under my real name of Kody Kester. As a display of my gratitude, I will still be writing one article a month for SA starting in July 2022.

Analyst’s Disclosure: I am/we are long EPD, MMP, ET, EQM. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (22)

Justanalysis profile picture
Another MLP, Energy Transfer (ET) just affirmed annual 2020 EBITDA guidance and changed the range from $11.1-$11.4b to $11.0-$11.4b. Only a $0.1 change? Nice!!! Also, considering delay of $500m of CapEx, which to me, in my opinion, gives a huge amount of cushion for the dividends, both common and preferred. Maybe this will ease fears across the entire sector tomorrow.
Kody's Dividends profile picture

Thanks for the comment. There will be some counterparty risk, but fears appear to be largely overblown from my perspective.
Well, if you loved MMP somewhere in the 40's, you must really love it at $31.
And EPD at $13
And ET at $5.

With yields above 13%. ET at 23%.

23%. Is ET a junk bond about to default??
Kody's Dividends profile picture
Wake up to Reality,

This selloff has been so severe that I believe it is greatly overdone, especially in midstream. Yes, there is some counterparty risk to the likes of ET, MMP, and EPD via weaker, less integrated energy customers. But these are priced to the point of major distribution cuts and perhaps that is because of the belief that this time is no different than 2014-2016. It is much different in that distribution coverage ratios across the industry have improved tremendously in the past few years. Thanks for the comment.
MMP was at about 22 this morning. amazing.
Kody's Dividends profile picture

No kidding. Midstream has been hated for years, but now even the best of breeds are priced as if they will be going out of business.
15 Mar. 2020
Fundamentals for even the best of breed in this space, (MMP, EDP and a few others) have been nothing short of meaningless for a year or two now. Just an unloved sector. I say this having had positions in both for quite sometime now. EDP going all the way back to 2006. Bought heavily after the 08 financial crash because there was a clear view to the upside and was well rewarded for it. This time it's different. Will they recover. Very likely and I don't plan on liquidating my positions. I need to understand where the Russian / Saudi price war pans out prior to adding here. Too many of these folks customers will be sorely tested prior to the air clearing. Have a good amount of cash ready to get back in when I can see the COVID-19 issue abating. There are just too many other battered shares that I see with a faster ramp up than any oil patch issue of any kind. And I like energy long term.
Kody's Dividends profile picture

Thanks for the comment. It's a pleasure to hear from a fellow MMP and EPD unit holder. Out of curiosity, what other stocks are you currently watching and considering adding to in the near future?
Kody's Dividends profile picture

Agreed and congrats on your 200 unit purchase! This has been quite an unprecedented week in terms of overall buying opportunities.
Kody's Dividends profile picture

Thanks for the comment.
Just picked up 200 shares this morning at $38.04 I believe in a couple years will be looking back at this as an incredible buying opportunity for these income generating companies, it would’ve been nice if all my holdings were at this cost but I am happy for what I have been able to buy is the company has come down through this panic
TigerMoney profile picture
EPD trading in the mid 14's today. you've got to be kidding me......!!

I thought I got a good deal at 16. Unbelievable!
Kody's Dividends profile picture

Thanks for commenting. I got a good deal at $19 on Monday, but it sure would have been better if I had waited until yesterday. Such is life I guess!
Fundamentals Are Meaningless This Week --

Magellan and EPD are both outstanding Midstream MLPs at a specific point in time when such enterprises are very high risk investments, whereas they are normally trading within a tight range which both companies have broken out of -- going lower.

That is true of the entire energy sector unfortunately. Unfortunately, because we certainly need energy as a society, and investors in energy need reasonable and fairly predictable rates of return. That's over this week. This week all bets are off - for now.

I never expected to buy Magellan for $40-44 or Enterprise for from $14-18 but that's exactly what this week brought. Since I follow the Asian and European markets, over the weekend the 20+% dip in Oil, and Oil and Gas equities screamed, the bad tidings of the week we are now steeped in -- as if last week wasn't bad enough.

The biggest danger for Magellan is a real and long-term, tangible reduction in domestic oil and refined oil production volumes. The crude oil is very likely to see reduced volumes due to lower price realizations whereas the refined products are more likely to maintain volumes that correlate more closely to the volumes of refined oil demand.

My suggestion is to take as little action as you can unless you can stand an outcome that may take months to correct. We have had the worst but more importantly most unpredictable week on the heels of our worst week in a decade. This week has overwhelmed even 2008-2009's losses, most of which recovered in a surprisingly predictable manner. However, a decade later we have global environmental and economic pressures which are connected and suggest that oil and gas aren't the only sources of future energy. For that reason, how these sector wide losses recover isn't the certainty that they were a decade ago.
Kody's Dividends profile picture

Thanks for the comment and I'm glad you enjoyed the article.
Kody's Dividends profile picture

Thanks for the comment. It's certainly been a rough 3 days, especially for midstream.
metal27 profile picture
Thanks, but your thesis is cold comfort when your three-day-old price quote of $52 for analysis purposes is $7 above the price today. When I can't find a bottom, I start looking for the door.
anomaly1 profile picture
"bankrupting some of Magellan's customers" this is a will happen event. End of this year
Kody's Dividends profile picture

Thanks for commenting. MMP's smaller customers with less already less than stellar balance sheets are certainly the most at risk and won't make it out of this energy bear market.
Informative report, and encouraging for long-term MMP investors (like me).

Retired dividend-growth investor
Kody's Dividends profile picture

Thanks for the comment and I'm glad you enjoyed the article. It's a pleasure to hear from a fellow unit holder.
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