Stocks have gotten the wind knocked out of their sails this month. That sell-off has created some compelling opportunities for investors with a long-term mind-set to scoop up shares of companies they like for lower prices.
One that I couldn't resist taking advantage of was the sell-off in energy midstream giant Enterprise Products Partners (NYSE:EPD), which has lost nearly 7% of its value in the last month. That lower price makes an already ridiculously cheap stock an even better bargain, especially when factoring in the dividend growth it has coming down the pipeline.
A top dividend stock in good times and bad
Enterprise Products Partners has been an exceptional growth dividend stock over the years. The master limited partnership (MLP) has increased its distribution to investors 66 times since its initial public offering two decades ago, including in each of the last 57 straight quarters. When factoring in its latest raise, and the sell-off in its unit price this month, the MLP now yields an attractive 6.3%.
That high-yielding payout is as safe as they come. For starters, Enterprise Products Partners generates very stable cash flow since long-term contracts back the bulk of its assets. At the moment, 88% of its cash flow comes from predictable fees.
Adding to the safety of its payout is the fact that Enterprise covers it with cash flow by a comfortable 1.5 times. Because of that, the company was able to generate $1 billion in excess cash flow above its distribution through the first half of 2018, which gave it some of the funding needed to continue expanding its midstream footprint. Meanwhile, the company complements its sound financial profile with a strong balance sheet, which includes one of the top credit ratings among MLPs, backed by a low leverage ratio.
Just starting to reaccelerate
That rock-solid income stream alone would be reason enough to buy Enterprise Products Partners right now, especially since its current yield has risen above 6% due to the recent sell-off. However, the company adds to its appeal by also boasting strong growth prospects.
After a couple of relatively flat years due to the impact of the oil market downturn, Enterprise Products Partners' growth engine restarted in 2017 when distributable cash flow (DCF) rebounded 6.2%. That engine shifted into another gear in 2018 as DCF rocketed 27.7% through the first half of this year versus the same period in 2017. Driving that growth was the $5.5 billion of expansion projects the company has completed in the last 18 months.
However, there's plenty more growth in the tank since the company finished another $400 million of expansions in the third quarter, which should provide a further boost when it reports third-quarter results at the end of October. In addition to that, Enterprise is on pace to complete a further $700 million of growth projects by year-end and has another $4.6 billion of expansions under way for 2019 and beyond. As those new assets come online, they'll add a further boost to the company's cash flow, giving it the fuel to continue growing its distribution to investors.
With so much growth coming down the pipeline, Enterprise expects that by early next year it will be in the position where it's generating more cash than it needs to fund its go-forward plan, which includes financing half of its expansion projects with retained cash flow. As a result, the company could increase its distribution growth rate or start buying back some of its dirt-cheap units. Either option has the potential to create value for investors.
A great company for a lower price
Enterprise Products Partners has been a great dividend growth stock over the years, which isn't a trend that I see ending anytime soon since it has plenty of fuel to continue growing its payout for at least the next few years. Because of that, I couldn't resist the opportunity to add to my position in this great company during October's sell-off. With shares already so inexpensive, and plenty of growth on the horizon, I think this purchase will generate market-beating total returns in the coming years, which would put me another step closer to reaching my financial goals.