Magellan Midstream Partners (MMP) is one of the largest master limited partnerships (MLPs) in the U.S. with a pipeline system that is linked to nearly half of the total U.S. refining capacity, notes Ben Reynolds, editor of Sure Retirement.
Nearly two-thirds of operating income comes from refined products, with transportation and storage of crude oil contributing the remainder. This MLP has a market capitalization over $10 billion and generates revenue approaching $2.8 billion.
Magellan Midstream Partners reported results for the fourth quarter of 2021 on February 2nd, 2022. The MLP’s business has recovered from the pandemic due to higher demand for refined products. As a result, distributable cash flow grew 10% and earnings-per-share of $1.24 was ahead of estimates.
Magellan Midstream Partners had a distribution coverage ratio of 1.26 for the year. Total shipments are expected to grow 4% in 2022, but leadership guided towards a 4% reduction in distributable cash flow due to asset sales. The MLP repurchased 5% of its outstanding shares during 2021.
Competitive Advantage & Recession Performance
The sheer size of Magellan Midstream Partners’ pipeline system sets it apart from its peers as the partnership has a reach that the competition simply does not have. As such, the partnership has an entrenched business model, one that would be very difficult to replicate.
Another advantage is that Magellan Midstream Partners operates a fee-based model, meaning that just 10% of its operating income is dependent on commodity prices. This enabled the company to withstand the severe declines in energy prices in 2014 and 2017.
As such, Magellan Midstream Partners can produce solid performance even during recessions. The partnership’s earnings-per-share for the 2007 to 2010 period was $1.55, $2.21, $2.22, and $2.85. Magellan Midstream Partners also continued to raise distributions during that period.
Growth Prospects, Valuation & Catalyst
We feel that investors should value Magellan Midstream Partners on its cash flow per share. We project that the partnership will produce cash flow per share of $5.20 for 2022. Magellan Midstream has a price-to-cash-flow of 9.6.
We assume a fair price-to-cash-flow ratio of 12. Multiple expansion could add 4.5% to total returns if the stock were to reach our valuation target by 2027.
Perhaps the most attractive feature of MLPs is their tendency to offer very high dividend yields. Currently, the yield is 8.3%, which is nearly six times the average yield of the S&P 500 Index.
This high yield combined with an expected 3% growth rate for cash flow per share and a mid-single-digit contribution from multiple expansion leads to a total annual return projection of 13.5% for Magellan Midstream Partners.