For even the most secure dividend paying stocks, the thought that future dividend payments may not come is always in the back of investors minds. For investors in Magellan Midstream Partners (NYSE:MMP), there is always that twinge of fear that the energy industry will have some impact on the company's ability to pay its dividend. These concerns are likely overblown. Based on where the company is going in the coming quarters, it looks like the company should easily be able to keep growing its dividend through 2017. Let's take a look at how the company expects to do it and what, if any, are the potential detractors of that plan.
That's the plan
With 57 straight quarters of dividend increases under its belt, management clearly has its sights set on keeping that streak alive. Based on the company's most recent investor presentation, it plans to raise its payout by at least 8% in 2017. That may even be a conservative estimate because the company has maintained a payout increase of 13% annually since its IPO in 2001. It also raised its guidance for distributable cash flow in 2016 after the first quarter of this year, so the amount of money coming in the door might be better than anticipated and could lead to better growth down the road.
Even though much of Magellan's revenue is generated through fee based contracts, there is still a little room for growth from commodity prices. About 14% of the company's gross profits come from commodity based trading, and much of that part of the business has suffered during this downturn. It has been able to offset this weakness with new assets coming online, but it could lead to some pretty significant gains if we were to see a rebound in prices in the rest of this year and into 2017.
It should have the earnings power
If that turnaround doesn't come, though, Magellan should still have enough in future projects coming online to keep its dividend streak alive without compromising its financial standing. Between now and the middle of 2017, Magellan expects that $910 million in projects that are currently under construction will come online between now and the first half of 2017. The average EBITDA multiple of these investments is 7.1 times, so these are highly profitable projects that should lead to considerable increases in distributable cash flow.
It also helps that the company already has some wiggle room to raise its payout if it so wishes. Last quarter, the company's distribution coverage ratio was a respectable 1.19 times with $36 million in cash left over after paying investors. In the event that it can't grow its earnings for some reason over the next few quarters, Magellan certainly has the ability to do something to reward shareholders.
Is there a hurdle?
Pretty much every sign points to Magellan being able to raise its payout in 2017. It's at least worth taking a look at the potential reasons as to why it may not be able to. Much of its revenue is fixed, so there is little worry about a decline in revenue. The biggest concern would be if there are any unforeseen costs or expenses that could disrupt either its current offerings to customers or any of its future projects. That is, of course, the potential of a pipeline or storage tank failure. As we have seen over the years, pipeline leaks or spills tend to attract a lot of media publicity, and recent cleanup charges for such spills can run into the billions depending on the severity of the spill.
While the chance of such a spill happening is low, the financial impact can be great, so it is something that should always be in the back of investors minds. Longer term, there are other issues that could slow or stall Magellan's growth such as rising interest rates or a slowdown in growth for the energy industry, but the only real threat between now and 2017 would likely be accident related.
What a Fool Believes
By all accounts, it will take a pretty significant event to detract Magellan Midstream Partners from raising its dividend in 2017. It's even harder to find a reason why the company won't be able to keep its quarterly dividend streak alive over that time frame. If you are looking to buy this company, your investment time horizon should be much longer and should consider other threats, but for current investors there is little reason to fear a flat or lower dividend any time soon.
The Motley Fool recommends Magellan Midstream Partners. 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.
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