North American midstream giant Enterprise Products Partners (EPD -0.07%) is a bellwether in its industry. Add in 22 years of annual distribution increases, a fat 6.1% yield, and 1.7 times distribution coverage through the first six months of 2019, and there's a lot for dividend-focused investors to like here. But don't take the plunge just yet -- there's one more factor that you need to know before you buy this admittedly easy-to-love midstream goliath.
Some bona fides
Enterprise has one of the largest midstream footprints in North America, owning a massive collection of pipelines, processing facilities, storage, export terminals, and shipping assets. Very few peers can compete with the limited partnership's scale and reach -- think Kinder Morgan (KMI -0.64%), Enbridge (ENB -1.82%), and TC Energy (TRP -1.72%), all giants in the midstream space. However, there's a notable difference between Enterprise and these three other companies. And that difference is found on the balance sheet.
Enterprise has consistently made more conservative use of leverage than these three peers. To put a number on this, today the partnership's debt-to-EBITDA ratio is around 3.2. The others are between 4.9 and 5.1. This is the norm; Enterprise is usually toward the low end of the midstream peer group on this key leverage metric. And it doesn't appear to have any plans to change that.
In fact, Enterprise recently decided to slow the rate of its distribution increases for a couple of years so it could self-fund more of its own growth. It is, effectively, looking to use cash it generates from its business to pay for capital expenditures so it doesn't have to tap the capital markets as much as it used to. This conservative midstream company is actively looking to get even more conservative, which is highlighted by the huge 1.7 times distribution coverage. For reference, 1.2 times is considered a solid number in the sector.
Risk-averse investors looking for big yields today would do well to take a close look at Enterprise. But that should include an examination of its actual balance sheet.
Digging in to the numbers
Enterprise has roughly $26.4 billion in long-term debt and shareholder equity of just under $25 billion. That puts long-term debt at a little more than 50% of the capital structure. For a capital-intensive business with largely fee-based income backed by long-term contracts, that's a very reasonable figure.
But that debt figure alone isn't the full story. The vast majority of this debt is long-term, with roughly half tied to 30-year bonds. Another 30% or so is attributable to 10-year bonds. Overall, Enterprise's average maturity is about 19 years. The average interest rate the company has to pay, meanwhile, is a reasonable 4.5%. And its maturities are fairly well staggered over the next few years, with a heavier flow of debt coming due further into the future (as you'd expect based on the debt profile noted above).
Enterprise currently covers its trailing-12-month interest expenses by solid 5.5 times. That, for reference, is much more robust than peers Enbridge, TC Energy, and Kinder, which have times interest earned ratios of 3.5 to 2.8. With a more modest use of leverage than its peers, you'd expect Enterprise to have an easier time covering its interest costs. But it is important to think all of this through a little.
Enterprise's conservative finances make it resistant to adversity. That includes industry headwinds and company-specific problems. With a strong balance sheet and generous distribution coverage, there's no reason to expect temporary hardships to cause the partnership's 22-year streak of annual distribution increases to come to an end.
If you are retired and want to make sure your dividend checks keep coming in, then Enterprise should be high up on your short list. When you look at some of the key factors that could lead to a dividend cut (like high leverage, weak dividend coverage, and onerous interest expenses), Enterprise stands out from its closest peers. Although distribution growth has historically been in the low- to mid-single digits, which is below that of some of its more leveraged peers, it has bested inflation over time to grow unitholders' buying power. Sure, you can find higher-yielding stocks and stocks with higher dividend growth rates, but the risk/reward combination Enterprise offers is very compelling today.