Investors looking for yields no longer need to sift through smaller, high-risk names. Top energy stocks, which historically traded at much lower yields, currently offer yields that would have been unimaginable a few years ago. Three such midstream stocks are Enterprise Products Partners (NYSE:EPD), Magellan Midstream Partners (NYSE:MMP), and MPLX (NYSE:MPLX). All the three are trading at yields above 10%. Importantly, the associated risk for each stock doesn't seem to have increased to the extent the stocks have fallen. As an investor, you need to know key facts that make each of these dividend stocks a compelling buy.
The yields of Enterprise Products Partners and Magellan Midstream Partners largely tracked each other historically, and both stocks are currently trading at yields much higher than the historical average. The same is true for MPLX, though as it was founded in 2012, it has a relatively shorter history.
Enterprise Products Partners has increased its distributions for 21 consecutive years and 62 consecutive quarters. As a conservative step considering coronavirus-related uncertainty, the company kept its distributions flat in the first and second quarters of 2020.
Magellan Midstream Partners has increased its distributions 71 times since its IPO in 2001. It kept its distributions flat in 2020 for the first time since 2009. Likewise, MPLX has kept its distributions flat in 2020 after increasing them every quarter since its listing. The distribution track record of each of the three MLPs is strong, which should give investors confidence about the safety of their respective payouts.
Resilient recent performance
The recent flat distributions, after years of growth, highlight how challenging and uncertain the current environment is for the midstream operators. However, the three MLPs all fared OK in what can be considered a most challenging quarter. Enterprise Products' distributable cash flow (DCF) fell by just 8.4% year over year in the second quarter. MPLX, in fact, posted a 2% rise in its second-quarter DCF year over year. Magellan Midstream's DCF was the most impacted among the three, falling 33% year over year.
While such a drop in earnings could spell trouble for highly leveraged operators, that's not the case for these three companies. Both Magellan and Enterprise Products have conservative debt-to-EBITDA ratios, well below 4 times. Similarly, MPLX reported a total debt-to-adjusted EBITDA ratio of 4.1 times at the end of Q2.
Moreover, Enterprise Products' DCF in Q2 was 1.6 times its distributions for the quarter. Similarly, MPLX's distribution coverage was 1.4 times in Q2. However, Magellan's coverage fell below 1 to 0.9 times for the quarter. While a coverage below 1 is unsustainable in the long run, things may not be that difficult for Magellan considering its 2020 DCF expectations.
Magellan Midstream expects to generate DCF of 1.1 to 1.14 times the amount required to pay distributions for 2020. Improving economic activity, recovering refined products demand, and improved commodity prices compared to April and May give the company confidence in its ability to generate the required DCF.
Similarly, Enterprise Products Partners is witnessing improved activity in its worst-hit segment, petrochemicals, thanks to improving refinery utilization rates.
Overall, all the three companies should benefit from improved oil, gas, and products volumes in the third quarter. In the long term, fossil fuels are expected to continue as a key energy source to meet the growing global demand for energy.
Attractive total returns
The total returns of the three stocks over the last five years are dismal compared to the S&P 500 Index.
Going further back, Enterprise Products and Magellan Midstream have generated total returns of 51% and 145% in the last 10 years, lower than what the S&P 500 has generated over the same time frame. While that may make the stocks' performance look unappealing, note that we are comparing returns when both stocks' prices are depressed.
Let's go further back and see returns over a 20-year timeframe, so the current dip in prices won't have that much of a significant influence.
As the above graph shows, both Enterprise and Magellan have drastically outperformed S&P 500 Index over a 20-year timeframe.
Surely, the lukewarm price performance over the last five years has left most investors wary about energy stocks in general and MLPs in particular. It could also be reflective of the opinion that the era of high oil and gas prices, which contributed to energy stocks' extraordinary performance prior to 2014, is probably over.
However, these three MLPs have fared well even in the "new normal" lower-price environment. Seasoned investors are, thus, sticking to their investments and enjoying regular dividend income from the three stocks. Moreover, all three stocks offer attractive entry points to income-seeking investors. Indeed, it's not only the past performance, but also the outlook that makes each of the three stocks a buy.