Top Picks 2016: Magellan Midstream Partners

01/29/2016 7:00 am EST

Focus: MLPS

My Top Pick for income in 2016 is a master limited partnership with the strongest fundamentals; accordingly, it has been discounted less than most others, explains Robert Rapier, editor of Energy Strategist.

Magellan Midstream (MMP) is as safe a bet as they come thanks to extremely conservative financial management and the good fortune to earn its money largely from handling the still surging volumes of refined fuels.

The leading shipper of refined fuels got 68% of its cash flow in 2014 from this steady, long-term business with built-in fee increases tied to inflation.

Crude pipelines linking major Texas producers with demand centers delivered another 23% of the cash, much of it also tied to multi-year contracts with fixed commitments.

In all, Magellan says only some 15% of its business has commodity exposure. It yields 4.6% based on a distribution recently increased 16% year-over-year and is committed to increasing its payouts at a comparable pace over the next few years.

As the owner of its general partner, Magellan doesn't have to pay out GP incentives like MLPs run by corporate sponsors.

For the most recent fiscal quarter MMP reported a 25% jump in distributable cash flow on the strength of record refined fuel pipeline volumes and robust demand for its crude pipelines and marine terminals.

The distribution coverage was 1.32x on a payout increased 14.2% year-over-year, for a current annualized yield of 4.9%.

Magellan modestly raised its annual profit guidance while sticking with plans to increase the distribution 15% this year and at least 10% in 2016.

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