In Bad Times, These 3 Dividend MLPs Become MVPs

After several years of strong stock market returns, investors are now facing surging inflation, a bear market and recession fears. In this article, we discuss the prospects of three Master Limited Partnerships that offer exceptionally high distribution yields with a wide margin of safety that can make it much easier for investors to endure times like this. These stocks are Enterprise Products Partners , Magellan Midstream Partners and MPLX . Beam Up to Enterprise Products Partners Enterprise Products Partners is a midstream MLP, with a vast network of pipelines and storage tanks. Its network includes nearly 50,000 miles of pipelines of natural gas, natural gas liquids, crude oil, and refined products. It also has storage capacity of more than 250 million barrels. Enterprise Products Partners is one of the most resilient companies in the energy sector, thanks to its defensive business model. The MLP collects fees that are proportional to the volumes of products transported and stored in its network. A key feature is the fact that the company signs minimum-volume contracts with its customers and hence it receives reliable amounts of fees even if its customers transport lower volumes than expected. The resilience of Enterprise Products Partners to recessions is clearly reflected in its exceptional distribution growth record. The MLP has raised its dividend for 22 consecutive years. As this period includes the Great Recession, the 70% plunge of the price of oil in 2014-2016 and the coronavirus crisis, there are extremely few energy companies that can boast of such a long distribution growth streak. Moreover, Enterprise Products Partners has almost fully recovered from the pandemic, with its volumes having approached pre-pandemic levels. Furthermore, the stock is currently offering a 7.8% distribution yield. Given the solid payout ratio of 58% of the stock, its decent balance sheet and its resilience to downturns, investors should rest assured that the distribution is safe for the foreseeable future. Therefore, Enterprise Products Partners is offering a safe haven in the highly inflationary environment prevailing right now. A Good Catch: Magellan Midstream Magellan Midstream Partners has the longest pipeline system of refined products, which is linked to nearly half of the total U.S. refining capacity. The transportation and storage of refined products generates 65% of total operating income, while the transportation and storage of crude oil generates the remaining 35% of operating income. Magellan has a remarkably resilient business model that is very similar to the business model of Enterprise Products Partners, though its operations are related to oil and its products instead of natural gas. Magellan has contracted more than 70% of its pipeline capacity with minimum volume requirements for the next five years and thus its cash flows should be considered reliable even in the event of a significant downturn of the energy sector. Thanks to its defensive business model, Magellan has proved nearly immune to downturns, including the coronavirus crisis. While most energy companies saw their earnings collapse and cut their dividends in 2020, Magellan reported just an 18% decrease in its distributable cash flow per unit and kept raising its distribution. Moreover, Magellan has an exemplary management team, which is focused on maximizing shareholder returns. It has the discipline to invest only in high-return growth projects and thus the MLP has exhibited some rare accomplishments. Most MLPs carry high debt loads, report poor free cash flows due to their investments on some low-return projects and dilute their unit-holders to a great extent on a regular basis. They also tend to have payout ratios near or above 100%. On the contrary, Magellan has posted positive free cash flows for more than 10 consecutive years and has a strong balance sheet, with a leverage ratio (net debt to earnings before interest, taxes, depreciation, and amortization) of 3.75. In addition, it does not dilute its unit-holders and has maintained a healthy payout ratio throughout the last decade. All these characteristics render Magellan a best-of-breed MLP. Magellan has an admirable distribution record. It raised its distribution for 70 consecutive quarters at a 12% average annual rate, until it froze its distribution in the second quarter of 2020 due to the pandemic. It paid the same distribution for seven consecutive quarters and resumed raising its distribution in the fourth quarter of 2021 thanks to the recovery of the energy sector. Overall, Magellan has raised its distribution for 20 consecutive years, at a 10% average annual rate. Moreover, Magellan is currently offering an 8.8% distribution yield. Given its decent distribution coverage ratio of 1.2, its defensive business model and its healthy balance sheet, it is safe to conclude that the distribution is safe for the foreseeable future. On the other hand, due to a lackluster pipeline of growth projects, investors should not expect significant distribution growth going forward. Nevertheless, the exceptional yield of the stock and its defensive nature certainly offer an attractive combination in the current investing environment. MPLX Goes the Distance MPLX is a diversified MLP, which was formed by Marathon Petroleum (MPC) in 2012. It operates in two segments: Logistics and storage, which involves the transportation and storage of crude oil and refined products, and gathering and processing, which is related to natural gas and natural gas liquids. Logistics and Storage generates approximately 65% of the total EBITDA of MPLX. Just like Enterprise Products Partners and Magellan, MPLX has a fee-based model, which involves minimum-volume contracts and has proved resilient to the downturns of the energy sector. It is thus natural that MPLX has proved much more resilient to the coronavirus crisis than the average energy company. Its distributable cash flow per unit dipped only 9% in 2020 and has recovered above pre-pandemic levels, at new all-time highs. It is also important to note that MPLX has never cut its distribution throughout its 10-year history. In addition, the stock is currently offering an eye-opening 9.7% distribution yield, with a solid distribution coverage ratio of 1.65 and a healthy leverage ratio of 3.7. Given these metrics and the defensive business model of the MLP, investors can rest assured that the distribution will remain safe in the absence of a prolonged downturn of the energy sector. The market has caught most investors off guard this year, with 40-year high inflation eroding the real value of their portfolios and the risk of an upcoming recession having caused a bear market. These three MLPs, however, offer a safe haven.

In Bad Times, These 3 Dividend MLPs Become MVPs

Here are Master Limited Partnerships that should protect investors in times of turmoil.

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