Magellan Midstream Partners (MMP 2.09%) has been a fantastic dividend growth stock over the years. The energy company has increased its payout 70 times since its IPO in 2001, including by 4% over the past year. Its latest increase helped push the company's yield up to 6.5%.
On the one hand, there have been some concerns about the company's ability to keep growing its payout after next year, given the big upcoming decline in capital spending. However, the MLP has helped dampen those worries by recently securing several new expansions which will enhance its ability to keep increasing its payout in the coming years.
Putting a bit more fuel in the growth engine
At the end of the second quarter, Magellan Midstream anticipated that it would spend $1.1 billion on expansion projects this year and another $150 million in 2020. That significant drop off in investment spending next year was a concern since it implied that the company didn't have much fuel to grow its cash flow in the future. The main culprit was the cancellation of a large oil pipeline project in the Permian Basin, which cut $450 million out of its capital budget.
Magellan Midstream, however, revealed in its recent third-quarter earnings report that it has since added some new growth projects to its backlog. The company noted that, based on its current progress, it expects to spend $1 billion this year and another $400 million in 2020 to complete its current slate of projects for a net $150 million increase in investment spending. Among the projects it recently moved forward with were some pipeline enhancements to transport more refined products in West Texas and some incremental crude oil storage capacity in the Permian Basin. Meanwhile, the company noted that it has more than $500 million of additional expansion opportunities under consideration that could drive faster growth in the future.
Remaining conservative despite its financial firepower
The recent addition of new projects to Magellan Midstream's backlog will enhance its ability to grow its high-yielding distribution in the future. Further backing that view is its strong cash flow and top-tier balance sheet.
Magellan Midstream's cash flow is on pace to grow faster than it initially expected this year. The company currently estimates that it will produce $1.26 billion in cash in 2019, about $40 million higher than its prior guidance, and roughly 13.5% above last year's level. That's enough money to cover the MLP's 6.5%-yielding payout by a comfortable 1.35 times this year, even after factoring in its plans to increase it by 5% from last year's level. That's well above the company's target of having a coverage ratio of at least 1.2 times.
On top of that, Magellan has one of the highest credit ratings among MLPs, backed by one of the sector's lowest leverage ratios. Because of that, the company has ample financial flexibility not only to continue investing in expansion projects but also to potentially make acquisitions.
The company, however, has made it clear that it won't pursue growth opportunities just for the sake of expanding. Instead, it will only invest when it can earn returns that meet its high standards. While this disciplined approach could cause it to grow cash flow at a slower pace, it should create the most value for investors over the long run.
A solid dividend growth stock for the long haul
Magellan Midstream Partners' disciplined investment approach means that it won't spend money on new projects just because it can. Instead, it will only approve those that meet its strict criteria, which was the case in the third quarter as it found a few more that met its standards. Those new additions, when combined with the company's top-tier financial profile, enhance its ability to continue increasing its high-yielding payout in the coming years. That makes it an excellent income stock to consider buying for the long-term.