Last year didn't go quite as investors in Enterprise Products Partners (EPD 0.80%) hoped it would. Units of the master limited partnership (MLP) lost about 2% of their value, and provided a total return of about 4% after factoring in its distribution -- a far cry from the S&P 500's nearly 22% total return last year.
However, because of that lackluster performance, Enterprise Products Partners entered 2018 trading at a remarkably cheap valuation for such a low-risk income stock. While it's not quite the bargain it was prior to its recent rebound, it still looks like a good MLP to consider buying in 2018, especially considering its growth plans.
Still a reasonable option
Units of Enterprise Products Partners entered 2018 selling for just 13.4 times distributable cash flow (DCF). For perspective, that was meaningfully below its historical average of more than 15 times DCF. Further, it's much cheaper than rivals Magellan Midstream Partners (MMP -0.19%) and Williams Partners (NYSE: WPZ), which currently sell for 16.7 and 15.6 times DCF, respectively. Because of that lower valuation, Enterprise entered the year yielding an attractive 6.3%, compared to its historical average range of between 4% to 6%.
That said, Enterprise units have been a hot commodity lately, gaining 8% since the start of the year, and has rebounded 20% from its most recent trough in November. As a result, it now sells for a slightly higher valuation of 14.6 times DCF, while its yield has compressed a bit to 5.8%. Based on those numbers, it's not as compelling as it was a few months ago, and not quite as irresistible as some other MLPs. That said, Enterprise still offers an attractive yield for a reasonable price, especially compared to Magellan and its 4.7% payout.
A big year ahead
Enterprise Products Partners' current valuation is even more reasonable when considering the growth that's on deck for 2018. After DCF declined due to the impact of the oil market downturn in 2016, Enterprise Product Partners' financial results started growing again last year. DCF improved 5.4% through the third-quarter versus the same period of 2016. Fueling that rebound was an uptick in the oil and gas volumes flowing through its systems.
So last year was good, and 2018 should be even better: The company either recently completed or is in the process of finishing $4.5 billion of growth projects, which should deliver a meaningful boost to DCF in early 2018. On top of that, it has another $2.4 billion of expansions on pace to enter service by the end of this year, which should provide some incremental DCF growth in 2018. As that materializes, it could propel further gains in Enterprise's unit price, especially since it's still cheap relative to rivals. Meanwhile, that rapidly rising cash flow puts the company in the position to potentially accelerate its pace of distribution increases in 2019, which could enable it to match or even exceed the mid-to-upper single-digit-percentage growth rates of Williams and Magellan.
It all adds up to a good buy
Enterprise Products Partners isn't as compelling a buy as it was at its low point last November, which might lead some investors to want to wait for a pullback. That decline might not come, however, because it still trades for a cheaper valuation than peers like Magellan Midstream Partners and William Partners, despite recently completed expansion projects that should fuel big-time DCF growth this year. The visible earnings improvement ahead, a relatively low price, and attractive yield, make this MLP a good choice for income investors to consider in 2018.