Tulsa, Oklahoma-based Magellan Midstream Partners LP (MMP, Financial) has been exemplary after beating earnings expectations quarter after quarter for the past 12 months. As a result, the operator of the U.S.’s longest refined products pipeline has outperformed its broader master limited partnerships index this year.
Magellan has been able to steadily increase its dividend payouts since it was founded in 2000. The operator of nearly 10,000 miles of pipeline system currently has a dividend yield of 6.66% with a payout ratio of 90%.
The company further exhibited its commitment to its partners by increasing its cash distribution for the 70th time just a week before its earnings release.
For the next quarter, Magellan projects it will deliver earning of $1.13 per unit compared to $1.37 a year ago. This may throw off some investors, but its earnings last year were bumped up further because of an asset disposal it made. Absent this $335 million asset disposal, the company would still have steady profit growth year over year.
Nonetheless, Magellan carries a leveraged balance sheet with $135 million in cash and $4.9 billion in debt and lease liabilities with $2.7 billion in equity.
The company also appears to be paying most, if not even more, than its free cash flow to its unit holders.
Since January of this year, the pipeline company handed out $689 million in dividends while having generated $204 million in free cash flow. The company appears to have a habit of committing more than its free cash flow for distribution or dividend handouts as it has a free cash flow payout average of 161% over the past three years.
Wall Street seems to like Magellan as it has remained bullish on the stock with an average price target of $10 higher than today’s share price of $60 per unit. This is despite the stock handily beating its index so far this year. Magellan is up 6.6% year to date while the Alerian MLP Exchange-Traded Fund (AMLP, Financial) is down by 6.7%.
Dividend-hungry investors may consider adding a minor exposure to this ever-consistent dividend payer. Despite the company’s leveraged balance sheet and above free cash payout model, Magellan appears to be a vital part of the U.S.’s refined petroleum transport in the coming years.
Disclosure: Long Magellan.
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