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
-
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
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
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
-
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
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.
Be the first to comment