Enterprise Products Partners (NYSE:EPD) has been a premier dividend stock over the past couple of decades. The master limited partnership (MLP) has increased its distribution to investors in each of its 22 years as a public company, which has it closing in on dividend royalty. Furthermore, it has typically given its investors a raise each quarter, having reeled off a streak of 61 straight quarterly distribution increases.
That growth appears quite likely to continue, given Enterprise's top-notch financial profile and sector-leading growth prospects. Add its increasingly attractive valuation to its above-average 6.6%-yielding dividend, and Enterprise Products Partners tops the list of stocks that income-seeking investors should buy this December.
A top-of-the-line payout
Enterprise Products Partners' main attraction is its above-average payout. Income investors can rest easy, as it's on as firm a foundation as they'll find in the energy sector. That's because it generates very stable cash flow that has minimal exposure to commodity prices. Overall, 85% of its earnings come from steady fee-based activities.
Meanwhile, there's an ample margin of safety with this distribution, since the company covers its current level with cash flow by 1.7 times, well above the typical 1.2 comfort level of most MLPs. The company further enhances the sustainability of its payout by having one of the highest credit ratings in the midstream sector. That strong financial profile gives Enterprise the flexibility to continue paying its high-yielding distribution, as well as invest in expansion projects that grow its cash flow.
A highly visible growth profile
Enterprise Products Partners has been highly successful in securing high-return expansion opportunities this year. During the third quarter alone, the company approved $3.1 billion of new projects, which boosted its backlog up to $9.1 billion in expansions that should come online through 2023. That's one of the largest growth project backlogs in the U.S. midstream sector, as many of its rivals have struggled to add new projects this year because of a drilling slowdown resulting from weaker commodity prices.
Enterprise has succeeded where others have failed in large part because of its focus on supporting fast-growing demand for oil and gas from the petrochemical sector as well as by overseas markets. For example, one of its most recent project approvals was to build a second propane dehydrogenation facility. This plant will turn propane into polymer-grade propylene that petrochemical maker LyondellBasell will use to make a variety of products like plastics. It also has several export-related projects under construction and in development, including an offshore oil port. With a steady supply of demand-driven expansions like those coming one line over the next several years, Enterprise's cash flow should keep growing, giving it plenty of fuel to continue increasing its distribution.
All this for an even better price
Enterprise Products Partners completed $1.9 billion of expansion projects last year and another $3 billion through the third quarter. These projects have helped the company grow its cash flow by 14% year to date.
However, despite that big uptick in cash flow, Enterprise's unit price has risen only about 3% over the past 12 months. Furthermore, it has come down about 8% from its recent highs because of some renewed volatility in the oil and gas market, meaning its valuation has gotten progressively cheaper. The company's price to cash flow ratio, for example, has fallen from an already attractive 9.5 at this point last year to an even lower 8.8. That cheaper valuation comes even though the company's distribution is on an even firmer foundation while its growth prospects have improved.
An exceptional buy this December
Enterprise Products Partners has a long history of rewarding income investors. That doesn't appear as if it will end anytime soon, given the company's top-tier financial profile and sector-leading growth prospects. Add in its more attractive valuation as a result of its recent swoon, and it's one of the top opportunities that dividend investors will find this December.