Published:
December 8, 2008
Through its wholly owned Magellan General Partner, which in
turn owns Magellan Midstream Partners (NYSE: MMP), Magellan Midstream Holdings
(NYSE: MGG, $13.16) operates
pipelines and storage terminals to ship refined petroleum
products and ammonia from the Gulf of Mexico to markets in
Illinois, Minnesota, and Colorado.
Its ownership position entitles MGG to receive 2% of the cash
distributed by the operating company MMP, together with
increasing percentages of any incremental cash distributed by
MMP. Structured as a limited partnership, MGG must pass along
most of this investment income to shareholders.
In other words, MGG's shareholders are the prime beneficiary of
any dividend increases by its operating company. Not only do
they get a piece of MMP's dividends, they also get a bigger
piece of the rising dividend every time the dividend is boosted.
For example, when operator MMP announced a quarterly dividend
hike earlier this month that equated to +9% year-over-year,
parent MGG chimed in with a +22% raise. The latest increase
brings MGG's quarterly payout to $0.354, bringing the yield to
10.8% of today's price.
Over the past 12 months, the company has paid out $1.26 per unit
in dividends on $1.32 per unit in earnings, giving it a 96%
payout ratio. Most of the dividends are considered tax-deferred
return of capital, so the stock is best held in a taxable
brokerage account.
MGG's per-share earnings have grown an average +40.4% over the
past three years through 2007, while the annual payout rate has
soared +240% since the company initiated dividends in 2006.
Profits are tied to the volume of petroleum products shipped
through the company's pipelines and stored in their terminals.
Reduced demand for refined products could affect profits, but
tariff increases pegged to the Producer Price Index should help
offset some of the earnings shortfall.
Growth will also be driven by ongoing expansion projects and
acquisitions. And given the company's strong balance sheet, it
isn't planning on going to the capital markets to raise cash for
these projects. CEO Don Wellendorf of Magellan Midstream (MMP)
told shareholders the partnership will use internally generated
cash flow to fund its slate of expansion projects and draw upon
its existing $550 million line of credit to take advantage of
potential acquisitions.
While we are inclined to sit tight until the dust settles on
Wall Street, some opportunities are extremely enticing. MGG is
one of them. This cash-rich dividend grower is still trading
near its 52-week lows. For income investors willing to withstand
some inevitable volatility in order to capture a double-digit
yield, MGG offers excellent long-term value.
Good investing!
Carla Pasternak
Editor
High-Yield
Investing
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