Let me ask you this: Would you be interested in a stock that has increased its dividend 61 times since going public in 2001 and has crushed the broader market since its inception? I can't imagine there are a lot of investors that would say "no thanks" to something like that. 

The company I'm talking about isn't in some hypergrowth industry; it's Magellan Midstream Partners (NYSE:MMP). Just your average pipeline company that transports gasoline and diesel across the country and has delivered a total return of 2,630%.

How has the company been able to deliver such market-shattering returns over the years? Let's look at what Magellan has going for it and what you need to know if you want to invest in this stock.

An oil pipeline under construction

Image source: Getty Images.

What's in the sauce?

It's kind of hard to see how a company that does something as benign as transporting and storing refined petroleum products can deliver such incredible returns, especially when you consider that demand for these products has grown 0.6% annually since the company went public. 

While there is a multitude of factors that have made this possible, I think we can distill them down to three things: its business model, its corporate structure, and its management. 

Let's start with the business model. Refined petroleum product demand hasn't grown much over the years, but it has remained incredibly steady. Magellan delivers these products under fixed-fee contracts that mostly keeps it insulated from the volatility in commodity prices. This means that the company has a steady revenue stream from its existing assets. Also, since much of its pipeline network serves communities where it is the only provider of these products, a decent portion of its business is regulated like a utility that ensures a fixed rate of return. 

Since pipelines and storage terminals are high up-front cost, low-maintenance assets, the business generates loads of cash on a quarterly basis that it can make available to shareholders. 

Then there is the issue of structure. Magellan is a master limited partnership, which means it is a tax-advantaged corporation that passes its income onto the owners of the business. While many companies have this corporate structure, there is one thing that makes it unique: It doesn't have a general partner that owns incentive distribution rights (IDRs). IDRs are similar to a management fee that entitles the general partner to a percentage of available cash. Without IDRs, all of that cash is evenly distributed among the common unitholders. It also helps that no IDRs means the company has a lower cost of capital than many of its peers. 

The thing that makes Magellan such a great investment, though, is that its management team knows exactly how to use these two elements to generate superior returns over the long term. Even though it has a low cost of capital, management only pursues growth projects that have a high rate of return and add value to the company's existing transportation and logistics network.

According to the most recent investor presentation, all of the projects under construction have a projected EBITDA multiple of less than 7. The only exception to that rule are its two export facility projects and those have lower rates of return because they are the first phases of multiphase projects that will ultimately have higher rates of return.

On top of management's disciplined capital allocation strategy, it is also known for prudent budgeting. Unlike many master limited partnerships that pay out all available cash at the end of each quarter, Magellan deliberately retains some cash each quarter to pay for these expansion projects. I know it sounds like an obvious thing to do, but you would be astounded by the number of management teams that think they can rely on external capital alone (debt and/or equity) to pay for projects.

When you add all of these things up, Magellan has been able to chart a course that has resulted in a payout to shareholders that has increased 12% annually since it went public, with plenty of growth in the wings to keep it going for some time. 

MMP Total Return Price Chart

MMP Total Return Price data by YCharts.

The one potential hitch

If there is one thing that may make investors shy away from Magellan's stock, it's that it is a master limited partnership. Since an MLP is already considered a tax-advantaged investment that pays distributions instead of dividends, it means you are responsible for your share of the businesses income taxes (which you pay at your individual tax rate). Also, it can cause some headaches if you own MLPs in a retirement account because they are considered unrelated business income. Basically, you can't double-dip with a tax-advantaged business held in a tax-advantaged account. Also, there is some additional paperwork to fill out come tax time because of this unique corporate structure.

What a Fool believes

For years, Magellan has flown under the radar. It rarely makes a splashy acquisition or makes headlines for one reason or another. It just strives to grow the business at a modest rate that focuses on high rates of return and prudent financial management. That simple approach is why the company has had repeat success for close to 20 years. With shares trading at a distribution yield of 5.5%, now is one of the more attractive times to add shares. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.