Despite choppy oil prices, master limited partnership (MLP) Magellan Midstream (NYSE: MMP) has managed to produce record distributable cash flows (DCFs) over the past year.
But that's not altogether surprising, considering 90% of the firm's income is fee-based, leaving just 10% sensitive to commodity prices. It's also why we've held it in our portfolio over at The Daily Paycheck since 2010.
Magellan At A Glance
For those who are unfamiliar, Magellan owns 9,700 miles of refined products pipelines that connect with roughly half of the nation's refineries. It also operates 53 terminals that have 45 million barrels of gas and diesel fuel storage capacity. That's in addition to 2,200 miles of crude oil pipelines that feed storage systems from the Gulf Coast to the nation's main hub in Cushing, Oklahoma.
Magellan doesn't take possession of any oil or other liquids -- it just gets paid for storage and transportation services. That compensation comes in the form of tariffs and fees (often under long-term contracts) based on the volume of oil and refined products flowing through its networks.
Thanks in part to a 4.4% tariff increase at mid-year, the company delivered record DCF of $1.1 billion in 2018 -- more than enough to cover dividend distributions (for a dividend coverage ratio of 126%).
Cash flows dipped about 2% in the fourth quarter, but that was strictly due to charges from discontinued projects and operations. One of those was a low-margin ammonia pipeline. Personally, I like to see management walk away from marginally profitable business lines and show disciplined spending restraint.
But that's not to say that Magellan isn't expanding in other areas. In fact, the company intends to deploy another $1.3 billion in growth projects this year, including a 600-mile conduit to increase sorely-needed oil takeaway capacity in the Permian Basin of west Texas.
Action to Take
After investing $1.3 billion this year, Magellan's capital expenditure (CapEx) spending is expected to taper off to just $0.4 billion next year. That will leave more cash on the table for distributions. As it stands, this cash machine has already raised dividends 67 times (almost every 90 days) since the 2001 initial public offering (IPO). Along the way, yearly dividends have marched ahead at a 12% annual pace, rising $0.56 per unit to the current $4.00.
That equates to a lofty yield of nearly 7%. What's more, during the time we've held MMP in our portfolio over at The Daily Paycheck, the stock has not only rewarded our readers with steadily rising dividends (which we reinvest as a part of our long-term wealth-building strategy), but subscribers are we're now sitting on a total return of nearly 360% at last count.
As with all MLPs, there are tax considerations that come along with owning MMP. But with strong spot shipping rates on several pipelines and upbeat 2019 DCF forecasts, I recently upped my rating on this dividend monster to "Buy" from "Hold."