Enterprise Products Partners (EPD 0.30%) is one of the leading midstream limited partnerships. It is a well run company with great assets and notable growth potential. However, after years of profitable ownership, I recently sold it. You might want to, too.
A good business
Enterprise owns over 50,000 miles of pipelines, 200 million barrels of liquids storage, 14 billion cubic feet of natural gas storage, 24 natural gas processing plants, 22 natural gas liquid (NGL) and propylene fractionators, six offshore hub platforms, and an NGL import/export terminal. Recently announced acquisitions will augment those numbers further. Enterprise is, without question, one of the largest players in the midstream space.
And it's gotten this big in a good way. The best example being the partnership's acquisition of its General Partner (GP) in 2010. That roughly $8 billion purchase removed the need to pay incentive distributions to the GP. That's good because the incentive distributions reduced the cash that could be sent to unit holders and made acquisitions more difficult to justify financially.
The around 40 consecutive quarters of distribution hikes is pretty impressive, too. It's a statement backing management's long-term intent to reward unit holders. And it's no wonder, since management owns roughly a third of the partnership's units. The future for Enterprise Products Partners' business looks bright, as well, with roughly $5.4 billion worth of internal growth projects currently under construction in addition to acquisition led growth.
EPD 5 Year Total Returns (Daily) data by YCharts
I Like Enerprise Products Partners
Put simply, I like Enterprise. I believe it is a well-run partnership with an appropriate level of respect for its unit holders. So, why sell? Because great businesses aren't always great investments.
And when it comes to Enterprise Products Partners, the price had gotten too high for my taste. When I purchased the partnership, Limited Partnerships (LPs) were something of an obscure investment niche dominated by small investors. That's no longer the case. The income provided by these pass through entities has attracted more and more attention in a yield starved world. In fact, mutual funds, closed-end funds, and exchange-traded funds have increasingly jumped onto the bandwagon, too.
Meanwhile, Enterprise's industry leading position and solid performance history hasn't gone unnoticed. The units are up more than 200% over the last decade, while spitting out a nice income stream all along the way. However, the partnership's yield and price have diverged materially, with the current yield hovering around 4%. In the search for yield, investors have pushed Enterprise, a company designed to reward unit holders with distributions, to a point where its yield is increasingly less compelling.
Looking beyond yield, consider the dramatic increase in the company's price to distributable cash flow. At year end 2012, this metric stood at around 7.5 times. Estimating that Enterprise will have around $3.9 billion in distributable cash flow in 2014, a roughly 5% increase year over year, the current price to distributable cash flow is a whopping 18.5 times. The market is clearly placing a heightened value on the units compared to the recent past.
That's nowhere near the level at which I bought in and notably below competitors that are solid companies, too. For example, Energy Transfer Partners (ETP) yields above 6%. Granted Energy Transfer Partners is part of a much more complicated business, which includes other partnerships and a GP, but a roughly 50% boost in distributions is ample compensation for the added complication and risk.
In fact, you don't even need to look within the LP space to find industry-dominating companies whose stocks yield more than Enterprise. For example, toy colossus Mattel is yielding around 4.9%, giant utility Southern Company is also yielding about 4.5%, and international tobacco powerhouse Philip Morris International is yielding 4.5%. You could argue that there's a reason for these relatively high yields, but similarly impressive yields can also be found in the real estate investment trust arena from top-notch competitors.
Should you sell, too?
The answer to this question clearly depends on your situation. For example, if you've owned the shares for a long period of time, your yield on purchase price will likely be well above the 4% or so yield available to new investors since Enterprise has been hiking its dividend regularly for years. That said, if you can find an investment you like (a key variable here) that's currently yielding more than Enterprise, you'll increase your income stream by switching. Any of the three non-pipeline stocks above could qualify. So, too, could a well situated LP like Energy Transfer Partners, if you wanted to stick with the pipeline theme. Of course there are also tax issues to think about when selling an LP that shouldn't be ignored since a portion of distributions are return of capital. In the end, your situation will dictate the decision, but for me the rapid price increase has pushed the shares too far, too fast.
In fact, I consider the relatively low yield offered by Enterprise to be a notable risk factor. Yield compression driven by investors searching for yield in a low-yield world can only go so far before there's no more room to run. And at that point, I expect Enterprise's units will either flat line or fall. I wanted to get out before that point and lock in my gains. It was a hard decision because I still believe Enterprise is a great company, but that, in the end, didn't make it a great investment right now.
