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Is Magellan Midstream Partners, L.P. a Buy?

MMP Average Diluted Shares Outstanding (Quarterly) ChartMMP Average Diluted Shares Outstanding (Quarterly) Chart
MMP Average Diluted Shares Outstanding (Quarterly) Chart

MMP Average Diluted Shares Outstanding (Quarterly) data by YCharts.

Despite low leverage and little new unit issuance, Magellan hasn’t skimped on growth spending. The partnership has dolled out $600 million or more in each of the last five years on capital projects and acquisitions. And it isn’t pulling back, either. It has plans to spend $800 million in 2018, its highest level of spending over the past decade. For 2019, the partnership has roughly $350 million of projects lined up, with another $500 million under consideration. The current projects being worked on already have customers lined up, or are at facilities where demand justifies the spending, so they are low-risk investments.

The biggest proof of Magellan’s success, though, comes to investors each quarter in the form of distributions. Magellan has increased its distribution every year for 18 consecutive years. However, within that annual streak is a quarterly streak that dates back to the partnership’s IPO in 2001. The compound annual growth rate in the distribution over that span is an incredible 12%.

MMP Dividend Per Share (Quarterly) ChartMMP Dividend Per Share (Quarterly) Chart
MMP Dividend Per Share (Quarterly) Chart

MMP Dividend Per Share (Quarterly) data by YCharts.

For 2018, Magellan is targeting 8% distribution growth, lower than the past but still nearly three times the historical rate of inflation growth. (For comparison, Enterprise’s distribution is only expected to grow in the low single digits as it shifts its funding approach.) Meanwhile, the target coverage ratio is a robust 1.2 times, which provides ample protection for the distribution and even leaves room for further increases. Indeed, despite the broad midstream downturn and FERC ruling, it looks like little has changed at this partnership but investor perception.

Go your own way

Right now, the Wall Street crowd is negative on midstream companies. But it appears that the negativity is punishing even the best-run names in the space, like Magellan. It can be hard to go against the grain, but Magellan and its over-6% yield appear to be on sale today. This opportunity has presented itself despite the impressive operating and distribution history, and the strong prospects for future performance.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners and Magellan Midstream Partners. The Motley Fool has a disclosure policy.

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