While no one likes to lose money, that's a risk all investors take when they put money into stocks. However, some businesses make it less likely that an investor will permanently lose money. While the company might have a down year, it has the financial and operational strength to recover, which makes its stock much less risky.
Three companies that skew toward the lower end of the risk spectrum are Enterprise Products Partners (EPD 1.29%), Magellan Midstream Partners (MMP), and MLPX (MPLX 0.69%). That's because these energy infrastructure master limited partnerships (MLPs) have stable businesses and top-tier financials, which makes them safer options for investors.
Growing even safer
Enterprise Products Partners is one of the largest energy midstream companies in the country. The MLP makes its money by operating pipelines and storage facilities, which act like tollbooths and parking meters by collecting a steady supply of fees as oil and gas pass through its vast system. Overall, those stable assets support about 92% of the company's earnings, which has helped Enterprise continue generating relatively steady cash flow when times get tough.
That cash flow stability enables Enterprise Products Partners to pay a growing cash distribution to investors, which currently yields 6.4%. Adding further support to that payout is that Enterprise covers it with cash flow by a comfortable 1.2 times, and it has a top-tier balance sheet, including one of the highest credit ratings in the industry. While the company's metrics put its payout on rock-solid ground, Enterprise recently announced plans to further strengthen its financial situation by growing its distribution at a slower pace next year so it can widen its already conservative coverage ratio and generate more cash to fund expansion projects. That focus on shoring up an already strong foundation will make Enterprise Products Partners an even less risky option in the coming years.
Nearly a mirror image
Magellan Midstream Partners' financial metrics are right up there with those of Enterprise. For example, it also has one of the top credit ratings among MLPs, and it keeps its distribution coverage ratio above 1.2. Meanwhile, it gets about 90% of its income from stable fee-based sources or other low-risk activities such as transporting and storing oil. Those factors put its 5.1%-yielding distribution on solid ground.
Furthermore, one of Magellan's focuses in recent years has been to further drive out risk by increasing the percentage of earnings that come from stable fees. That led the company to invest billions of dollars in building and buying additional fee-generating assets. Currently, the company has $1.7 billion of fee-based assets under construction, which should help further reduce cash flow volatility. That focus on fees, when combined with its strong financial metrics, will continue pushing risk out of Magellan's business.
Even stronger numbers
MLPX's financial metrics are a step above both Magellan and Enterprise. For example, it currently gets 95% of its earnings from fee-based sources, and its distribution coverage ratio averaged 1.29 over the past year. Further, while its credit rating is a couple of rungs below those rivals at the moment, the MLP's leverage ratio is in the same range as theirs. Those factors put its 6.1%-yielding distribution on a firm foundation.
Meanwhile, MPLX is currently in the process of further reducing risk by significantly growing its size and simplifying its corporate structure. The first step of the process is acquiring the remaining logistics and storage assets of its parent company, Marathon Petroleum (MPC 1.20%), in an $8.1 billion deal, which will further bolster cash flow. In addition to that, Marathon Petroleum agreed to eliminate its costly management fees in exchange for additional units of its MLP. Once MPLX completes its strategic transformation early next year, its improved scale and top-tier financial metrics will help keep risk at bay.
Growing less risky by the day
These MLPs remain highly focused on reducing risk. That's why they continue to build and buy assets that generate predictable cash flow from long-term contracts while at the same time working to improve their financial metrics. Those efforts to strengthen their already healthy businesses is what makes them such exceptional options for investors seeking lower-risk options.