Is it Time to Sail with Magellan?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Magellan Midstream Partners L.P. (NYSE: MMP) is a company operating in the transportation, storage, and distribution of refined petroleum products. Magellan’s vast network of pipeline stretches approximately 9,600 miles, covering the eastern and middle regions of the United States, in addition to possessing 50 terminals, as shown below.

 

At the moment, Magellan is worth $8.8 billion on the market. Over the past year Magellan Midstream has been on a tear, rising 31.78% during a period in which the S&P 500 has only rallied 7.63%. With a 52-week low of $51.00 and 52 week high of $79.01, Magellan is significantly closer to its high than low. Magellan also pays out a substantial dividend yielding around 5.00%. So is it time to sail with Magellan?

 

Magellan is Sailing to the City of Gold

In 2009, Magellan Midstream reported earnings per share of $2.22. In 2014, Magellan Midstream is projected to derive $4.73 from its business. That represents a 113.06% increase in earnings per share over just 5 years. Based on these statistics, Magellan’s compound annual growth rate is 16.33%, a tremendous feat. Magellan Midstream’s growth is persistently in the double digits, or in the high single digits, and will prove to be a catalyst for the stock over the coming years. Magellan’s growth will allow the company to support its heavy dividend as well as reinvest in its own company and possibly acquire other high growth companies. The chart below displays Magellan’s sales, operating profit, net income, net margin, and operating margin over the foreseeable future.

 

A Dividend Pipeline that Won’t Run Dry  

On July 26th Magellan Midstream announced it was significantly increasing its quarterly distribution to $0.9425. This is the 41st increase Magellan has implemented in its dividend over the course of existing as a public company. Paying out an annual dividend of $3.77, at the current price of $77.78, Magellan yields 4.85%, well north of the 10 year treasury rate around 1.60%, and outpaces inflation at 1.70%, and is projected to grow further into the future. By 2014, Magellan Midstream’s dividend is anticipated to reach $4.45, displaying a 18.04% increase in dividends over 2 years. At current prices that would put Magellan’s dividend yielding 5.72%. Magellan’s growth is substantial enough to support the heavy burden of its dividend, and leaves money to put towards growing the company. The chart below displays Magellan Midstream’s earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

  

Moving What Moves America

Compared to some of Magellan’s most prominent competitors, such as: Plains All American Pipeline L.P. (NYSE: PAA), Western Gas Partners L.P. (NYSE: WES), Enbridge Incorporated (NYSE: ENB), and Kinder Morgan Energy Partners L.P. (NYSE: KMP), Magellan stacks up relatively favorably.

 

2009-2014 EPS Growth

Current Dividend Yield

2009-2014 Dividend Growth

MMP

113.06%

4.85%

52.92%

PAA

78.01%

4.94%

35.16%

WES

111.29%

4.26%

111.38%

ENB

-0.47%

2.82%

90.54%

KMP

102.38%

6.16%

34.05%

       
 

Price/Earnings Ratio

Price/Earnings/Growth Ratio

Net Profit Margin

MMP

19.48

2.02

23.45%

PAA

17.19

2.70

2.13%

WES

28.70

1.50

20.10%

ENB

46.05

2.15

5.17%

KMP

80.23

10.25

0.98%

In terms of growth, Magellan leads the industry more than doubling in 5 years. Kinder Morgan possesses the largest dividend in the industry, while Western retains the fastest growing dividend. In the fundamental ratio comparison, Plains All American appears to be trading with the lowest multiple, while Kinder Morgan appears to be vastly overpriced. When growth is taken into account, Western Gas appears to be trading at the lowest multiple. In the net profit margin comparison, Magellan stands out to the upside, while Kinder Morgan takes the lowest position.

The X Factor

Midstream operators, such as Magellan, are not paid by the price of the commodities they are transporting, yet instead are paid for by the volume they transport. This is tremendous for companies such as Magellan, as they do not need to constantly monitor commodity prices. Additionally, midstream operators are more immune to the United States’ mammoth corporate tax rate than other sectors. This allows more of the Midstream’s income be passed down to the investor, an extremely advantageous trait among MLP’s. Finally, Midstream operators’ earnings are highly predictable, as they are locked in demographic trends, highly correlated to population growth. This clarity among MLP’s has led to less volatility over the overall market, as there is greater predictably.    

The Foolish Bottom Line

With market fluctuations as common as getting a cup of coffee in the morning, it will be comforting to know that inside your portfolio sits a company that has paid out dividends since going public, and yields nearly 5.00%. Magellan has already run up tremendously, and is pushing new all-time highs nearly every day, but is still not overly expensive. All in all, Magellan has persistent growth and a significant dividend, which is growing, and is highly diversified with pipelines stretching over two-thirds of the United States, making it time to go sailing with Magellan. 


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Magellan Midstream Partners, L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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