Enterprise Products Partners (NYSE:EPD) has been everything an income investor could have dreamed of over its nearly 20 years as a public company. Not only has the company paid investors every single quarter since its IPO in 1998, but it has increased the payout 60 times, including for the past 51 straight quarters. Enterprise has achieved that growth through a balance of acquisitions and growth projects, which has steadily increased its stream of stable cash flow.
That said, the company's best days appear to be ahead of it. That's because it not only boasts a well-supported current distribution of 6.2%, but it has visible growth coming over the horizon thanks to a slew of capital projects under construction. That combination of solid financials and clear growth potential makes Enterprise an ideal investment for income investors.
A strong foundation that's only getting better
One of the reasons why Enterprise Products Partners has delivered such steady growth throughout its history is due to the company's conservative financial management. The foundation of its financials is an investment-grade balance sheet and a well-covered distribution. The company currently has one of the highest credit ratings among MLPs at BBB+/Baa1, backed by a conservative debt-to-adjusted EBITDA ratio that has averaged a comfortable 4.3 times over the past year. Furthermore, leverage is on its way down to 4.0 times once its current slate of expansion projects enter service this year. Meanwhile, Enterprise routinely retains a substantial portion of its cash flow to reinvest in growth projects, including maintaining a 1.2 times distribution coverage ratio last year.
For comparison sake, rival Energy Transfer Partners' (NYSE:ETP) leverage ratio has been well above 5.0 times over the past year, and it had a sub-1.0 times coverage ratio for much of the recent past. Those weaker metrics were the driving force behind its decision to combine with an affiliate that had stronger financial metrics. That deal also amounted to a back-door distribution cut for Energy Transfer Partners' investors, which it deemed as a necessary step to get its distribution coverage back above 1.0 times and its leverage down to a more comfortable 4.0 times over the next year.
In addition to the sound financial profile, another pillar of strength for Enterprise Products Partners is the stable cash flow it collects from its predominately fee-based asset base. Thanks to its focus on building and buying fee-based assets over the past few years, the company has reduced its direct exposure to commodity prices from 17% of its gross operating margin in 2013 to just 7% this year. Because of this improving stability, Enterprise delivered stable cash flow during the recent oil market downturn. Contrast this with Energy Transfer Partners, which saw its cash flow decline during the market's turmoil, causing its balance sheet to weaken and prompting the payout cut.
An $8.4 billion building boom with more on the way
With a strong balance sheet and stable cash flow, Enterprise Products Partners can maintain its current payout rate for the foreseeable future. That said, what makes it such a compelling stock for income investors is the growth that's clearly up ahead coming from the $8.4 billion of capital projects it currently has under construction.
The company expects to commission about $2.9 billion of those projects this year, with all but $100 million scheduled to enter service this summer. The largest project is Enterprise's PDH facility, which will turn propane into a feedstock for making plastics. Once up and running, the plant will generate steady cash flow for the company because it has secured fee-based contracts for 100% of the capacity, and they run for an average of 15 years.
Enterprise has two more waves of project completions coming down the pipeline, with $3.3 billion of assets expected to enter service next year and another $2.2 billion in 2019. Among those projects is the recently sanctioned Shin Oak NGL pipeline, which will move liquids from the fast-growing Permian Basin to the company's NGL fractionation and storage hub in Mont Belvieu, Texas.
Meanwhile, the company is already working to capture additional opportunities so it can continue growing. One of the projects Enterprise has in development is a potential natural gas pipeline from the Permian to the Gulf Coast. That said, competitors have already proposed similar pipelines, so this project isn't a sure thing. Because of that, it might need to get creative, and instead of trying to beat out competitors, it could choose to join forces with one of them. Aside from this project, Enterprise has acquired land adjacent to several of its hubs in recent years, giving it plenty of room to expand those facilities once it lines up customers that need access to additional capacity.
Enterprise Products Partners has been a consistent dividend grower throughout its history thanks to its prudent financial management and focus on building and buying assets that provide it with predictable cash flow. With its next three years of cash flow growth already locked up thanks to projects under construction, the company shouldn't have any problem keeping its distribution growth streak alive. It's a powerful combination that should continue to make Enterprise Product Partners an income investor's dream come true.