Enterprise Products Partners (EPD -0.31%) has been a fantastic stock for income investors over the years. The master limited partnership (MLP) has increased its distribution to investors every year for the past two decades, including in each of the last 59 quarters. As a result of all that growth, the midstream company now yields a well-above-average 6.1%.
The MLP has plenty of growth still left in the tank, which is one of the many factors that makes it an attractive income stock to buy this month.
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A top-notch payout
The main attraction with Enterprise Products Partners is its lucrative cash distribution. However, while the company's current yield is well above average, that doesn't mean it's high risk. Three factors put the company's payout on one of the firmest foundations in the energy industry.
First, Enterprise Products Partners generates very predictable cash flow backed primarily by fee-based contracts. In the first quarter, for example, 83% of the company's earnings came from these stable sources.
Second, the MLP only uses about 60% of its cash flow to support its high-yielding payout. That's a conservative level for a midstream company; they are often comfortable paying out 80% of their cash flow.
Finally, the company has one of the top credit ratings among MLPs. It backs that rating with a low 3.5 times leverage ratio. That strong balance sheet, when combined with the cash it retains after paying the distribution, gives Enterprise Products Partners the financial flexibility to invest in expansion projects. That formula has helped fuel steady growth in its payout over the years.
Visible growth prospects
Enterprise Products Partners currently has $5 billion of growth projects underway, which it should finish over the next two years. As those expansions enter service, they'll supply the company with incremental cash flow that it can use to continue increasing its distribution.
In addition to those projects, Enterprise has several more in development. The company is currently working on $5 billion to $10 billion of additional growth opportunities. One noteworthy project that it's pursuing is an offshore crude oil port that it wants to build near Freeport, Texas. The facility would be capable of fully loading very large crude carriers, which can hold 2 million barrels of oil. Enterprise's ability to secure additional expansion projects like that one will enable it to continue growing both its cash flow and distribution.
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An attractive price
Typically, companies that boast a strong financial profile and solid growth prospects and pay an excellent income stream sell for a premium valuation. However, that's not the case with Enterprise Products Partners. While the MLP's unit price has risen about 16% this year, it's only up about 4% over the past 12 months. The company's cash flow, on the other hand, has surged 28% over that time frame. Thanks to that, Enterprise trades at a much cheaper valuation.
The company has generated $2.77 per unit of cash flow in the last 12 months. However, the fact that its units currently trade at around $29 apiece implies that Enterprise Products Partners sells for roughly 10.5 times cash flow. For comparison's sake, the market valued it at about 13 times cash flow around this time last year, which was closer to the industry's historical average.
A great option for income seekers
Enterprise Products Partners checks all the boxes for investors. It offers them excellent income, solid growth prospects, a strong financial profile, and a reasonable valuation. Those factors add up to make it an ideal stock for income-seeking investors to buy this month, since they should help it generate market-beating total returns in the coming years.
