Magellan Midstream Is A 9% Yield You Can Trust In These Crazy Times (NYSE:MMP)

Financial Volatility

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This article was coproduced with Dividend Sensei.

Every bear market feels like a crisis, and only in hindsight does it become obvious it was a glorious blue-chip buying opportunity.

While the 2022 bear market has so far followed the historical model relatively closely, that doesn’t mean that we haven’t seen some truly wild, crazy, and unprecedented things. That’s what happens in every bear market.

For example, in the Pandemic, we saw oil hit -$38, a price that even industry veterans had once though impossible.

In this bear market, we’ve seen UK treasury bonds trade at 5X higher volatility than Bitcoin.

When “risk-free” assets can fall 50% in a matter of days and put 90% of UK pension funds at risk of bankruptcy, you can understand why investor fear and bearish sentiment are at multi-decade highs.

But it’s precisely in dark times like this when investor fear of missing out has turned to despair, that safe ultra-yield becomes most valuable. Why?

Because when you can earn almost 10% safe yield from day one, you never have to worry about what share prices do in the short-term.

When you can live richly off safe yield, then only fundamentals determine your standard of living over time, and fundamentals are much more stable than stock prices.

Or, to put it another way, during bear markets, speculation gives way to sound long-term investing, and that’s when rich retirement fortunes are made.

So let me show you the three reasons why Magellan Midstream Partners, L.P. (NYSE:MMP) is an anti-bubble 9% yield you can trust. Not just in these crazy times, but likely for decades to come, in both times of euphoria and market despondency.

Reason One: Magellan Is The Complete Relatively Safe Ultra-Yield Blue-Chip Package

Here is the bottom-line up front.

  • Magellan is an MLP and uses a K-1 tax form

  • 5 Things All MLP Investors Need To Know

  • typical foreign investors have a 37% withholding (whether they can recoup it depends on their country’s tax code).

What Magellan Does

Magellan owns the largest refined product (gasoline, diesel, jet fuel) pipeline network in the country, with over 11,000 miles focused on the Midwest.

Just 9% of MMP’s cash flow is directly sensitive to commodity prices, and management uses hedges to minimize cash flow sensitivity even further.

72% of its business is refined products, and 28% is oil transport, mostly focused on the Permian basin in Texas and US export facilities in Houston.

MMP was one of the first MLPs to simplify its business model and eliminate incentive distribution rights back in 2010, the last time it had to issue new units to fund its growth plans.

  • MMP pioneered the self-funding business model that became the gold standard of safety in this industry.

An FCF Self-Funding Business Model: The Platinum Standard of Safety

Year

Distributable Cash Flow

Free Cash Flow

Distributions

DCF Payout Ratio

FCF Payout Ratio

Distribution/Unit

2022

$1,089.3

$1,106.56

$865.28

79.4%

78.2%

$4.16

2023

$1,153.9

$1,098.24

$875.68

75.9%

79.7%

$4.21

2024

$1,183.0

$1,175.20

$888.16

75.1%

75.6%

$4.27

2025

$1,215.4

$1,125.28

$892.32

73.4%

79.3%

$4.29

2026

$1,234.7

$1,166.88

$900.64

72.9%

77.2%

$4.33

2027

$1,281.0

$1,241.76

$908.96

71.0%

73.2%

$4.37

Annual Growth

3.30%

2.33%

0.99%

-2.23%

-1.31%

0.99%

(Source: FactSet Research Terminal)

Magellan was one of the first midstream companies to cut back on growth spending in the pandemic oil crash, the worst in recent history. It’s now fully self-funding its growth through free cash flow, including a 78% free-cash-flow payout ratio that is expected to fall to 73% by 2027.

  • 83% DCF payout ratio is considered safe according to rating agencies

  • and sub 100% FCF payout ratio is safe.

Magellan has one of the industry’s most consistent payout track records, a 20-year streak that is expected to reach 25 years by 2027.

Metric

2021 consensus growth

2022 consensus growth

2023 consensus growth

2024 consensus growth

2025 consensus growth

2026 consensus growth

2027 consensus growth

Sales

30%

11%

4%

2%

NA

NA

NA

Distribution

1%

1% (Official)

1%

1%

1%

1%

1%

Operating Cash Flow

11%

-6%

14%

5%

NA

NA

NA

Distributable Cash Flow

11%

1%

10%

5%

3%

4%

6%

EBITDA

28%

13%

7%

1%

NA

NA

NA

EBIT (operating income)

38%

7%

12%

2%

NA

NA

NA

(Source: FactSet Research Terminal)

MMP has long had a policy of keeping leverage under 4.0, one of the lowest ratios in the industry.

  • rating agencies consider 4.0X or less debt/EBITDA safe for its business model considering its relatively short-term refined product pipeline contracts

  • which are regulated and adjusted each year for inflation

MMP Credit Ratings

Rating Agency

Credit Rating

30-Year Default/Bankruptcy Risk

Chance of Losing 100% Of Your Investment 1 In

S&P

BBB+ stable outlook

5.00%

20.0

Moody’s

Baa1 (BBB+ equivalent) stable outlook

5.00%

20.0

Consensus

BBB+ stable outlook

5.00%

20.0

(Source: S&P, Moody’s)

Rating agencies consider MMP to be a low-risk midstream with a 1 in 20 chance of default in the next 30 years.

Reasons To Potentially Buy Magellan Today

Metric

Magellan Midstream

Quality

76% 11/13 SWAN (Sleep Well At Night) Midstream

Risk Rating

Medium Risk

DK Master List Quality Ranking (Out Of 500 Companies)

344

Quality Percentile

32%

Dividend Growth Streak (Years)

20

Dividend Yield

8.8%

Payout Safety Score

77%

Average Recession Dividend Cut Risk

1.0%

Severe Recession Dividend Cut Risk

2.40%

S&P Credit Rating

BBB+ Stable

30-Year Bankruptcy Risk

5.00%

Consensus LT Risk-Management Industry Percentile

48% Average

Fair Value

$60.82

Current Price

$47.51

Discount To Fair Value

22%

DK Rating

Potentially Good Buy

Price/cash flow

8.4 (Anti-bubble blue-chip)

Growth Priced In

-0.2%

Historical P/OCF ratio

11 to 13.5

LT Growth Consensus/Management Guidance

5.4%

5-year consensus total return potential

14% to 23% CAGR

Base Case 5-year consensus return potential

18% CAGR (2X better than the S&P 500)

Consensus 12-month total return forecast

26%

Fundamentally Justified 12-Month Return Potential

37%

LT Consensus Total Return Potential

14.2%

Inflation-Adjusted Consensus LT Return Potential

11.9%

Consensus 10-Year Inflation-Adjusted Total Return Potential (Ignoring Valuation)

3.10

LT Risk-Adjusted Expected Return

9.44%

LT Risk-And Inflation-Adjusted Return Potential

7.22%

Conservative Years To Double

9.97 Vs. 15.2 S&P

(Source: Dividend Kings Zen Research Terminal)

Magellan 2024 Consensus Total Return Potential

na

FAST Graphs

Over the next three years, analysts think MMP could deliver 85% total returns, or a Buffett-like 31% annually.

Magellan 2027 Consensus Total Return Potential

na

FAST Graphs

Over the next five years, analysts think MMP could deliver 143% total returns, or a very impressive 18% CAGR.

Magellan Midstream Rolling Returns Since April 2001: Similar To What’s Expected Over The Next Five

That’s consistent with the average rolling return of 17% over the last 21 years.

Now compare that to the 10% undervalued and 1.9% yielding S&P 500.

S&P 500 2024 Consensus Total Return Potential

na

FAST Graphs

  • analysts expect about 15% annual returns from the market in the coming years, totaling a 37% return

  • MMP offers 2.5X the return potential of the S&P 500 over the next few years.

S&P 500 2027 Consensus Total Return Potential

Year

Upside Potential By End of That Year

Consensus CAGR Return Potential By End of That Year

Probability-Weighted Return (Annualized)

Inflation And Risk-Adjusted Expected Returns

2027

64.89%

10.53%

7.90%

5.59%

(Source: DK S&P 500 Valuation & Total Return Tool)

Over the next five years, analysts expect 10.5% annual returns from the S&P 500.

  • MMP offers 2X the return potential of the S&P 500

MMP Corp Investment Decision Tool

x

Dividend Kings

na

Dividend Kings

For anyone comfortable with its risk profile, MMP is a potentially very good ultra-yield blue-chip option right now.

  • 22% discount to fair value Vs. 10% S&P = 12% better valuation

  • 8.8% safe yield vs. 1.9% S&P (4.6X higher and safer yield)

  • 40% higher annual long-term return potential

  • 62% higher risk-adjusted expected returns

  • 4X the consensus 5-year income.

Reason Two: Solid Growth Prospects For Decades To Come

MMP is priced for -0.2% growth, but analysts are much more optimistic than that.

  • 5.4% CAGR is the median growth consensus

  • 2.7% to 9.7% CAGR growth consensus range

  • 8.5% CAGR is the historical growth rate over the last 20 years.

Smoothing for outliers, historical analyst margins of error are 5% to the upside and 5% to the downside.

  • 2% to 11% CAGR margin-of-error-adjusted growth consensus range.

Analysts expect a return to modest growth rates consistent with the last 19 years now that the worst-oil crash in human history is over.

Investment Strategy

Yield

LT Consensus Growth

LT Consensus Total Return Potential

Long-Term Risk-Adjusted Expected Return

Long-Term Inflation And Risk-Adjusted Expected Returns

Years To Double Your Inflation & Risk-Adjusted Wealth

10-Year Inflation And Risk-Adjusted Expected Return

Magellan Midstream

8.8%

5.4%

14.2%

9.9%

7.7%

9.4

2.09

Safe Midstream

6.3%

6.4%

12.7%

8.9%

6.6%

10.9

1.89

REITs

3.9%

6.0%

9.9%

6.9%

4.6%

15.5

1.57

Schwab US Dividend Equity ETF

3.6%

8.80%

12.4%

8.7%

6.4%

11.3

1.86

Dividend Aristocrats

2.8%

8.7%

11.5%

8.1%

5.8%

12.5

1.75

S&P 500

1.9%

8.5%

10.4%

7.3%

5.0%

14.4

1.63

(Source: DK Research Terminal, FactSet, Morningstar, YCharts)

MMP offers one of the most attractive long-term return potentials of any high-yield option on Wall Street, better than its peers, REITs, SCHD, the aristocrats, and S&P.

Inflation-Adjusted Consensus Total Return Potential: $1,000 Initial Investment

Time Frame (Years)

8% CAGR Inflation-Adjusted S&P 500 Consensus

9.2% Inflation-Adjusted Dividend Aristocrats Consensus

11.9% CAGR Inflation-Adjusted MMP Consensus

Difference Between Inflation-Adjusted MMP Consensus And S&P Consensus

5

$1,470.01

$1,553.50

$1,755.27

$201.77

10

$2,160.92

$2,413.37

$3,080.98

$667.61

15

$3,176.58

$3,749.18

$5,407.96

$1,658.78

20

$4,669.60

$5,824.36

$9,492.44

$3,668.08

25

$6,864.35

$9,048.16

$16,661.82

$7,613.66

30

$10,090.65

$14,056.34

$29,246.03

$15,189.69

(Source: DK Research Terminal, FactSet)

Over 30 years, analysts think MMP could potentially deliver 29X inflation-adjusted returns.

Time Frame (Years)

Ratio MMP Consensus/Aristocrat Consensus

Ratio Inflation And MMP Consensus vs. S&P consensus

5

1.13

1.19

10

1.28

1.43

15

1.44

1.70

20

1.63

2.03

25

1.84

2.43

30

2.08

2.90

(Source: DK Research Terminal, FactSet)

Over 30 years, MMP could potentially more than double the returns of the dividend aristocrats and almost triple the S&P 500.

Reason Three: An Anti-Bubble Blue-Chip Bargain

Over the last 20 years, outside of bubbles and bear markets, tens of millions of investors have consistently paid 11X to 13.5X cash flow for MMP.

  • 91% statistical probability that this is the fair value range for MMP

Metric

Historical Fair Value Multiples (16 years)

2021

2022

2023

2024

2025

12-Month Forward Fair Value

5-Year Average Yield

7.93%

$52.08

$52.59

$52.59

$53.85

$54.10

NA

Operating Cash Flow

12.73

$69.25

$64.80

$74.22

$78.29

NA

NA

Average

$59.45

$58.06

$61.56

$63.81

$54.10

$60.82

Current Price

$47.51

Discount To Fair Value

20.09%

18.16%

22.82%

25.54%

12.18%

21.88%

Upside To Fair Value

25.13%

22.20%

29.56%

34.30%

13.87%

36.78%

2022 OCF

2023 OCF

2022 Weighted OCF

2023 Weighted OCF

12-Month Forward OCF

12-Month Average Fair Value Forward P/OCF

Current Forward OCF

$5.09

$5.83

$1.08

$4.60

$5.67

10.7

8.4

I conservatively estimate MMP’s fair value at 10.7X cash flow, and today it trades at an anti-bubble valuation of 8.4x.

Rating

Margin Of Safety For Medium Risk 11/13 SWAN Quality Companies

2022 Fair Value Price

2023 Fair Value Price

12-Month Forward Fair Value

Potentially Reasonable Buy

0%

$58.06

$61.56

$60.82

Potentially Good Buy

15%

$49.35

$52.32

$51.69

Potentially Strong Buy

25%

$43.54

$46.17

$45.61

Potentially Very Strong Buy

35%

$32.08

$40.01

$39.53

Potentially Ultra-Value Buy

45%

$31.93

$33.86

$33.45

Currently

$47.51

18.16%

22.82%

21.88%

Upside To Fair Value (Including Dividends)

30.97%

38.34%

36.78%

For anyone comfortable with its risk profile, MMP is a potentially good buy.

Risk Profile: Why Magellan Midstream Isn’t Right For Everyone

There are no risk-free companies and no company is right for everyone. You have to be comfortable with the fundamental risk profile.

MMP Risk Profile Summary

“The partnership faces risks from peaking refined product demand, execution in new operating areas, and rising interest rates. From an environmental, social, and governance perspective, we are mindful of longer-term lower refined product demand as we expect gasoline demand to decline in the years ahead with the growth in electric vehicles.

Magellan can pivot to other fuels such as aviation, but air travel demand is similarly pressured due to COVID-19 and changing views toward air travel and carbon emissions. On the oil pipeline side, Magellan is exposed to a peak in U.S. demand but has somewhat mitigated this by being able to export barrels to international markets. Finally, Magellan has to manage its carbon emissions profile, as it is exposed to risks if the U.S. enacts a national carbon tax.

About 65% Magellan’s operating margin comes from transportation of refined products. Management is working to diversify its sources of earnings. However, the majority of the partnership’s results are tied to continued robust demand for gasoline and diesel, particularly in the central third of the U.S. This segment benefits from annually adjusted tariff rate increases tied to PPI, but any reduction in fuel demand could pressure earnings.

We see risks to the refined product business manifested in the partnership’s efforts to diversify the business. While the partnership has mitigated much of this risk through establishing joint ventures with other experienced operators and mitigated commodity cycle volatility through predominantly contracted offtake, there is operational risk and longer-term cyclical risk from these businesses. We’ve seen this with the decline in tariffs on Magellan’s Permian pipes due to additional competition, and the near-term outlook remains weak.” – Morningstar (emphasis added).

MMP’s Risk Profile Includes

  • political/regulator risk (for potential future major projects)

  • litigation risk (mostly interstate pipelines projects, not a current risk since no major interstate projects are underway)

  • industrial accident risk (up to $1 billion to clear up a spill)

  • energy transition risk (MMP is not investing in renewable energy as aggressively as its peers)

  • disruption risk (72% of revenue is from refined product volumes which are at high risk from EV transition)

  • M&A execution risk (industry consolidation is expected, and a lower yielding midstream could buy MMP)

  • talent retention risk (tightest job market in over 50 years).

Magellan is behind the curve on the energy transition, currently focused on a bit of biodiesel and ethanol. However, I am skeptical of the Energy Information Administration’s forecast that transportation fuel demand in the U.S. will remain relatively stable through at least 2050.

  • MMP doesn’t have a natural pivot to renewables as EPD or ENB have

How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.

Long-Term Risk Analysis: How Large Institutions Measure Total Risk

  • see the risk section of this video to get an in-depth view (and link to two reports) of how DK and big institutions measure long-term risk management by companies.

MMP Long-Term Risk Management Consensus ​

Rating Agency

Industry Percentile

Rating Agency Classification

Morningstar/Sustainalytics 20 Metric Model

66.5%

30.4/100 High Risk

Reuters’/Refinitiv 500+ Metric Model

60.4%

Good

Moody’s

50.0%

Average

FactSet

30.0%

Below Average, Stable Trend

Morningstar Global Percentile (All 15,000 Rated Companies)

35.0%

Below Average

Consensus

48.4%

Medium Risk, Average Risk Management, Stable Trend

(Sources: Morningstar, FactSet, Reuters, Moody’s)

MMP’s Long-Term Risk Management Is The 390th Best In The Master List (22nd Percentile)

Classification

Average Consensus LT Risk-Management Industry Percentile

Risk-Management Rating

S&P Global (SPGI) #1 Risk Management In The Master List

94

Exceptional

Strong ESG Stocks

73

Good

Foreign Dividend Stocks

75

Good

Ultra SWANs

71

Good

Low Volatility Stocks

68

Above-Average

Dividend Aristocrats

67

Above-Average

Dividend Kings

63

Above-Average

Master List average

62

Above-Average

Hyper-Growth stocks

61

Above-Average

Monthly Dividend Stocks

60

Above-Average

Dividend Champions

57

Average

Magellan Midstream

48

Average

(Source: DK Research Terminal)

MMP’s risk-management consensus is in the bottom 22% of the world’s highest quality companies and similar to that of such other blue chips as

  • Roper Technologies (ROP): Super SWAN dividend aristocrat

  • McDonald’s (MCD): Super SWAN dividend aristocrat

  • Jack Henry & Associates (JKHY): Super SWAN dividend champion

  • Nucor (NUE): SWAN quality dividend king

  • UGI Corp (UGI): SWAN quality dividend champion.

The bottom line is that all companies have risks, and MMP is average at managing theirs.

How We Monitor MMP’s Risk Profile

  • 17 analysts

  • 2 credit rating agencies

  • 6 total risk rating agencies

  • 23 experts who collectively know this business better than anyone other than management

“When the facts change, I change my mind. What do you do, sir?” – John Maynard Keynes

There are no sacred cows at iREIT or Dividend Kings. Wherever the fundamentals lead, we always follow. That’s the essence of disciplined financial science, the math behind retiring rich and staying rich in retirement.

Bottom Line: Magellan Midstream Is A Safe 9% Yield You Can Trust In These Crazy Times

When risk-free bonds trade with higher volatility than crypto, you know we live in crazy times.

When the market swings from euphoria to despair, and back again, sometimes in the same day, you know we live in crazy times.

When recession risk can rise or fall by 20% within hours, you know we live in crazy times.

The 2022 bear market has caused speculative excess to virtually disappear from Wall Street, which is a very good thing. But it’s come at a very high cost for many people, with over $40 trillion in global wealth vanishing in a matter of months.

Most of those losses aren’t real, as long as you own blue-chip assets, but it’s still terrifying for many.

In turbulent times like these, everyone is desperate for certainty, but in the short-term I can’t offer you any.

Let me be clear: I’m NOT calling the bottom in MMP (I’m not a market-timer).

Sleep Well At Night doesn’t mean “can’t fall hard in a bear market.”

Fundamentals are all that determine safety and quality, and my recommendations.

  • over 30+ years, 97% of stock returns are a function of pure fundamentals, not luck

  • in the short-term; luck is 33X as powerful as fundamentals

  • in the long-term, fundamentals are 33X as powerful as luck.

While I can’t predict the market in the short term, here’s what I can tell you about MMP.

  • One of the highest quality, safest, and most dependable deep value, ultra-yield blue-chips on earth.

  • 8.8% very safe yield, growing at about 1% over the coming years

  • 14.2% CAGR long-term total return consensus, better than the Nasdaq, aristocrats, S&P 500, SCHD, and REITs.

  • 22% historically undervalued, a potentially good buy

  • 8.4X cash flow (anti-bubble blue-chip)

  • 143% consensus return potential over the next five years, 18% CAGR, about 2X more than the S&P 500, Buffett-like return potential

  • 62% better risk-adjusted expected returns of the S&P 500 over the next five years.

  • 4X better income potential over the next five years.

If you’re tired of having your emotional strings yanked about by all this market craziness, maybe it’s time to focus on the fundamentals.

If you’re tired of obsessing over every Fed decision and every daily swing in bond yields, it’s time for blue chips.

If you’re tired of losing sleep in markets that can swing 7% in a single day, then it’s time to consider safe ultra-yield to pay the bills.

That’s where Magellan comes in, with one of the safest and most dependable rich retirement yields on Wall Street.

With Buffett-like return potential in the medium-term and life-changing 14% return potential for years and decades to come, hard asset gems like MMP are a great way to stay sane and safe in these crazy times.

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