Magellan (MMP) Rewards Unitholders With Distribution Hike

Magellan Midstream Partners, L.P.’s (NYSE:MMP) board of directors recently announced an increase in quarterly cash distribution for the fourth quarter of 2017. It has increased the distribution to 92 cents per unit from 90.5 cents per unit in the third quarter, representing around 1.7% sequential increase and 7.6% year-over-year increase.

Following the hike, the partnership’s new annualized distribution amounts to $3.68 per unit, up from $3.62 distributed earlier. This revised distribution is likely to be paid on Feb 14, 2018, to unitholders of record on Feb 6, 2018.

Should You Take Advantage of the Hike?

The proposed hike in distribution at Magellan Midstream is in sync with its goal of raising the annual distribution by 8% in 2017 and 2018. The partnership has a proven history of distribution growth with 63 quarterly increases since inception. For the last five years, Magellan Midstream has maintained a steep trend for its distribution hike per unit. The recent move will help it to boost shareholder value.

Although the partnership is facing some uncertainty currently with the FERC approval for its marketing arm, the distribution hike will help it to retain unitholders’ confidence. Moreover, Magellan Midstream generates much higher returns than other industryplayers. The partnership’s return on equity (ROE) is 41% compared with the industry’s 8.7%. In addition, the partnership’s capital deployment strategies have helped it to achieve return of capital (ROC) of 13.9%, much higher than the industry’s 4%.

Price Performance

Units of Magellan Midstream have lost 2.4% in the last year compared with 11.7% decline of the industry it belongs to.

About the Partnership

Tulsa, OK-based Magellan Midstream is a master limited partnership (MLP) that owns and operates a diversified portfolio of energy infrastructure assets. The partnership primarily transports, stores, and distributes refined petroleum products and, to a lesser extent, ammonia. Magellan conducts its operations in three segments: Refined Products, Crude Oil, and Marine Storage.

Magellan Midstream owns an attractive portfolio of energy infrastructure assets that generate stable and recurring fee- and tariff-based revenues. This includes the longest U.S. refined petroleum products pipeline system, access to almost 50% of refining capacity in the continental United States along with imports, and 85 petroleum terminals with around 100 million barrels of storage.

However, the partnership is facing pressure on the balance sheet. In the past five years (2012–2016), long-term debt increased at a CAGR of 14%. A continued rise in project outlays and tough operating environment were the primary reasons for the rise in debt. While the company is taking initiatives to reduce its indebtedness, it will take some time to recover.

Zacks Rank and Stocks to Consider

Magellan Midstream has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the oil and energy sector are Cabot Oil & Gas Corporation (NYSE:COG) , Royal Dutch Shell (LON:RDSa) plc RDS.A and Delek US Holdings, Inc. (NYSE:DK) . While Cabot sports a Zacks Rank #1 (Strong Buy), Shell and Delek have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Houston, TX -based Cabot is an independent energy company. Its sales for the fourth quarter of 2017 are expected to grow 37.2% year over year. Earnings for the year 2017 are expected to be up 357.1%.

Shell, based in The Hague, the Netherlands, is an integrated energy company. Its earnings for 2017 are expected to increase 102.2% year over year. The company delivered a positive earnings surprise of 18.1% in the third quarter of 2017.

Brentwood, TN-based Delek is an integrated energy company. Its sales for the fourth quarter of 2017 are expected to increase 95.7% year over year. The company delivered a positive earnings surprise of 19.1% in the third quarter of 2017.

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