Helmerich & Payne, Inc. (HP -0.85%) has increased its dividend for 44 consecutive years. That's no small achievement, and investors should be impressed, particularly given the pain the oil and gas services industry is feeling today. But what if you could own a company in a less cyclical part of the energy sector, with a higher yield, and an impressive dividend streak of its own? Well look no further than Enterprise Products Partners L.P. (EPD 0.21%). Here's why you should be looking at this giant midstream player.
Enterprise Products Partners employees at work. Image source: Enterprise Products Partners L.P.
Up and down
There's no question that Helmerich & Payne is a great company. It has less debt than its comparable peers, it has more of the most in-demand drilling rigs than its competitors, and its customers are larger than average for the industry. Perhaps most importantly, it has a larger market share than most of its peers in its core U.S. onshore business.
The fly in the ointment is that Helmerich & Payne's oil services business is highly cyclical. The company is prepared for the down markets, like the one we're in today. But at the end of fiscal 2016, 75% of its drilling rigs weren't being used. That had a material impact on the top and bottom lines, and it could, justifiably, put a scare in even the most stoic of investors.
Enterprise's distribution has a margin of safety. Image source: Enterprise Products Partners L.P.
Enterprise Products Partners' business is almost the exact opposite. It owns the pipelines and processing facilities that help get oil and gas from where it's drilled to where it's used. It is one of the largest players in the industry. And its business is build on long-term contracts with take-or-pay clauses. Enterprise is basically a toll-taker. It's actually boring, but if you're looking for income, boring is a good thing.
Big yield
Helmerich & Payne's dividend yield is a generous 4% (or so). Enterprise Products Partners' distribution yield is nearly 5.75%. Obviously no contest if you're interested in income, but there's more to understand.
Enterprise Products Partners is a limited partnership. That means it passes through income to unitholders, who then pay taxes on it as if they had earned it. But there's a wrinkle. Unitholders also get the benefit of deductions like depreciation. It's complicated, and you might want to discuss the issue with your accountant, but at the end of the day, a portion of the distributions you receive from Enterprise are tax-advantaged. That's kind of like a generous helping of icing on an already-sweet cake.
Dividend growth
The next point may look like a clear win for Helmerich & Payne, but don't jump to conclusions just yet. Helmerich has increased its dividend for 44 consecutive years, through good markets and bad. That handily beats Enterprise's 19-year streak. However, there's more to this story.
For example, while Enterprise's streak is less than half as long, it's currently on a run of 50 consecutive quarters. Helmerich & Payne's dividend was actually stuck at $0.688 a quarter for eight quarters as oil prices collapsed. That's two years. Its streak of annual increased remained alive only because it tends to increase dividends in the middle of the year. Sure, the annual streak lived on, but investors were left to fret that no mid-year increase in 2015 meant the dividend might be at risk. No such concern at Enterprise.
EPD Dividend data by YCharts.
Helmerich & Payne's dividend, which was increased in mid 2016, has ample coverage on the cash flow statement, but that's because the company has almost completely stopped building new drilling rigs. Without that spending, the add back of depreciation on the cash flow statement leaves plenty of money to support the dividend through the downturn. But without that spending, the company's business growth is on pause.
Enterprise, on the other hand, has continued to spend on growth right through the oil and gas downturn. In fact, it has roughly $5.3 billion worth of projects in some state of construction today. It's the difference between Helmerich essentially defending its dividend and Enterprise building its distribution from a position of strength. For income investors, the latter is a much better option if you want to sleep well at night.
It's the better option
None of this is meant to suggest Helmerich & Payne is a bad company. In the oil and gas drilling space, it's a clear industry leader. However, if you're an income investor looking for a mixture of high yield and security, Enterprise Products Partners is simply a better choice. Its business is less cyclical, it has a higher yield, and its distribution history is both impressive and building through growth-oriented investment. It should be higher on your income short list than Helmerich & Payne.
