Magellan Midstream Partners' Earnings Are Just One Reason To Love This Stock

Courtesy of Magellan Midstream Partners

Of the midstream MLPs out there, few have impressed more with its ability to continue growing quickly in the face of the worst oil crash in decades than Magellan Midstream Partners (MMP). 

Let's look at three key reasons Magellan's latest stupendous earnings results should have investors cheering; why Magellan Midstream's winning streak is likely to continue no matter what oil prices do; and why all dividend lovers should consider adding this MLP to their diversified income portfolios today. 

One of the best business models around
Around 85% of Magellan Midstream's operating margin is protected by long-term, fixed-fee contracts, meaning that its cash flow is not just recurring and highly predictable, but also largely immune from energy prices.

In addition Magellan's refined product pipelines and marine terminal businesses act as natural hedges against falling energy prices. Lower oil prices usually raise consumer demand for refined petroleum products like gasoline which Magellan transports. Meanwhile, high demand for storing oil until prices recover means Magellan's storage tanks are earning great returns while remaining at nearly full capacity.

Magellan Midstream's tollbooth business model means that volumes are far more important than energy prices. This is why Magellan was able to deliver 25% year-over-year distributable cash flow or DCF growth in the third quarter.  

Distribution profile that lets you have your high-yield cake and eat it too

Sources: Yahoo Finance, Fastgraphs, company 10-Qs, management guidance

Note that Kinder Morgan's  DCF growth is artificially high due to its 2014 buyout of its MLPs. 

As this table shows, among blue chip pipeline operators Magellan Midstream offers income investors a tantalizing combination of attractive yield, rock solid distribution security, and the best long-term payout growth prospects. 

Magellan's high coverage ratio means that in 2015 it should generate around $240 million in excess DCF. That extra cash doesn't just defend the payout against turbulent energy prices, it also serves as a major competitive advantage when it comes to financing future growth. 

Solid growth prospects even in a world of cheap oil
During an oil crash, a high coverage ratio is arguably the most important thing for investors to focus on because falling equity prices can result in rising financing costs for growth projects that are the lifeblood of the midstream MLP industry.

For example, Kinder Morgan CEO Steve Kean recently told analysts at the company's conference call that it doesn't plan to sell anymore common shares through mid-2016 because the low share price makes this form of financing too expensive.

When you compare Kinder Morgan's $219 million in excess DCF over the past nine months with Enterprise Products Partners $2.3 billion you can see the clear benefit of Enterprise's more conservative distribution policy.  

Kinder's lower excess DCF means it has a much higher reliance on equity financing. This means that its short-term share price matters far more to its future growth prospects than does Enterprise Products Partners'; which is able to internally fund much of its growth backlog.

Similarly, Magellan Midstream Partners excess DCF is large enough to finance a substantial portion of the $700 million of organic growth projects it has planned for 2016, or the over $500 million in potential growth opportunities or acquisition targets it's currently evaluating. 

In other words, thanks to their excess DCF rich business models, Magellan Midstream and Enterprise Products Partners are among the best in their industry at not diluting existing unit holders; which makes growing the payout easier in the long-term.  

MMP Shares Outstanding data by YCharts

Bottom line: One of America's best-managed MLPs continues to deliver where it counts 
No matter how you look at it, this quarter exemplifies just why Magellan Midstream Partners remains one of America's best MLPs, and one of its best dividend growth investments, period. Whether it's the bank vault-like security of the generous payout, or the impressive growth prospects that are largely immune to commodity prices, few do it better than Magellan Midstream.

With its latest spectacular earnings results, Magellan Midstream Partners has truly earned the right to be in every dividend investor's watch list, if not their diversified high-yield portfolios.