Is Enterprise Products Partners the Perfect Retirement Stock?

Recently I wrote about the importance of dividend growth stocks to achieving one's retirement goals. This is based on research by William Bengen, the father of the "4% drawdown" rule of thumb that many retirees rely upon in hopes they don't run out of money during their sunset years. 

I explained how Mr. Bengen amended that rule to a "5% drawdown" due to a 2008 study by Jack Gardner that concluded that a diversified portfolio of high-yielding stocks minimizes risk and maximizes returns, no matter what the time period.

That research further confirmed the 2004 findings of Ned Davis, who found that, between 1972 and 2004, dividend growth stocks outperformed every other kind of equity investment. 

Source: "DIVIDENDS, METALS, AND 1960 REPLAYS," Ned Davis Research.

Based on this compelling evidence, I've recommended Kinder Morgan Inc (KMI -0.64%) as an excellent choice for helping you achieve your retirement goals, whether that be 20 years in the future, or you're already retired. This is not only because of Kinder Morgan's high current yield of 4.5% but because the likely dividend growth can help you both grow your standard of living during a sustainable retirement. 

In this article, I'd like to introduce you to another pipeline company, one whose distribution growth record rivals that of Kinder Morgan and whose recent acquisition sets the stage for an acceleration of that growth and makes this company one that deserves a spot on your radar and potentially in your income portfolio. 

The old faithful of distribution growth
Enterprise Products Partners LP (EPD 0.45%) is the second largest midstream master limited partnership, or MLP, in America, with 51,000 miles of oil and gas pipelines crisscrossing the country. 

Source: September 9 Enterprise Products Partners Investor presentation

This $94 billion pipeline behemoth has 40 consecutive quarters of distribution growth under its belt, as well as several other facets that make it one of the most beloved income growth investments in America. 

For example, Enterprise's distribution is bomb-proof safe, courtesy of its 1.57 distribution coverage ratio (1.64 in the last quarter). Typically a ratio of 1.1 means the distribution is safe, sustainable, and ready to grow. Enterprise's ratio is among the highest in the MLP industry and allows the partnership to maintain and grow the distribution even in the most extreme of economic conditions, including during the financial crisis of 2008-2009. 

Another reason to love Enterprise is that 36% of its units (the MLP version of "shares") are held by insiders and that it doesn't have a general partner. This means no incentive distribution rights, which can result in up to 50% of marginal distributable cash flow being siphoned away, and gives the partnership a large competitive advantage over its competition. Specifically, it lowers the cost of capital, helping Enterprise grow both its business and distribution quicker, which in turn has resulted in a long track record of market-beating total returns. 

In fact over the past 15 years Enterprise Products Partners has grown its distribution at an annual rate of 7.95% and over the last 18 years has annual total returns (which include distribution reinvestment) of 15.3%. That's more than triple the S&P 500's returns of 4.6% over that same time period. 

EPD Dividend data by YCharts

As this chart shows, since 1998, not only has Enterprise grown its distribution faster than Kinder Morgan, but it's absolutely smashed the Alerian MLP index, which tracks its peers, and the S&P 500.

Can Enterprise, after growing so large, continue its winning streak of market-beating returns and distribution growth? I think it can, and to explain why let's look at the company's latest acquisition, OilTanking Partners LP (NYSE: OILT).

Buying its way to faster growth
On October 1 Enterprise Products Partners announced it was buying OilTanking Partners' general partner and incentive distribution rights from OilTanking Holdings Americas. The total deal, valued at $6 billion, will include Enterprise exchanging 1.23 units to investors of OilTanking Partners and will be done in two steps, pending approval by OilTanking Partners investors. Enterprise is confident that the deal will go through because if it does OilTanking Partners investors would benefit from an immediate 70% increase in distributions. 

Why is Enterprise Products Partners making this purchase? Well as fellow Fool Matt DiLallo explains in another article, OilTanking Partners and Enterprise have a long standing relationship (33 years) and OilTanking Partners owns assets that could be immensely profitable to Enterprise if America lifts its ban on crude oil exports. 

However, even if the ban isn't entirely lifted, Enterprise still stands to benefit, because on June 25 the US Commerce Department granted it and Pioneer Natural Resources (PXD -2.28%) approval to begin exporting minimally refined condensate, a type of oil that makes up 27% of the production of the prolific Eagle Ford shale in Texas. Analysts believe that condensate exports could reach 700,000 barrels/day (bpd) in 2015 and as much as 1.7 million bpd in 2018. 

This is where the genius of the OilTanking Partners acquisition shines through. 

Benefits of acquisition 
OilTanking Partners owns 12 ship and barge docks as well as 24 million barrels of oil storage capacity at its Houston and Beaumont, Texas facilities. Currently Enterprise uses these for exporting LPG (liquid petroleum gas). In fact, over the decades Enterprise has exported 600 million barrels of LPG through its relationship with OilTanking Partners. 

Given the potential that oil, condensate, and NGL (natural gas liquids such as ethane) represent to Enterprise, the company is confident that OilTanking Partner's existing facilities can be easily retasked for whatever export is most profitable.

Enterprise also expects that it will be able to squeeze out $30 million in synergies from the acquisition, which will increase its margins on LPG exports, a segment that contributed 10% of its operating profits in 2013.

However, what should excite investors most is the potential this acquisition has for accelerating distribution growth.

Why distribution growth could accelerate

Sources: Multpl.com, Yahoo! Finance, Fastgraphs

As this table shows, not only does Enterprise Products Partners have a yield nearly double that of the S&P 500, but prior to the purchase of OilTanking Partners, analysts expected it to grow its distribution 31% faster. Meanwhile, OilTanking Partners was expected to have one of the fastest growing distributions in its industry. 

Keep in mind that those current growth estimates include OilTanking Partners' IDR fees, which as explained previously, would grow to 50% of DCF going to its general partner. If the merger is approved then that DCF instead becomes available to increase Enterprise's own distribution. With a distribution coverage ratio of 1.57, that means that Enterprise could potentially grow its distribution slightly faster than its earnings. While that may not necessarily happen, with the added faster growth of OilTanking Partners in its portfolio, that 6.64% distribution growth rate could easily jump to 7% or 8%, which would be the same growth rate Enterprise investors have enjoyed over the last 15 years.

Bottom line
It's important to remember that past performance is no guarantee of future results. However, if Enterprise does maintain its historical distribution growth rate, which this acquisition could potentially help it do, then that greatly improves the chances of Enterprise Products Partners continuing its long-term distribution growth streak -- which would be a huge win for its investors. That is why I believe Enterprise can help you with your retirement goals. Whether that lies 30 years in your future, or you're already retired, a high, safe yield with likely 7%-8% distribution growth is something that benefits all income investors. That's why I think Enterprise Products Partners deserves at least a spot on your radar, if not in your portfolio.