Enterprise Products Partners (EPD 0.48%) offers investors a hefty 6.1% yield today. That's over three times the dividend yield provided by the S&P 500 index as a whole. Further, this natural gas and oil pipeline powerhouse has increased its distribution for 22 consecutive years. Those two facts alone should entice just about every income investor to take a look, but the case for buying the stock gets even better once you start to dig in a little.
More dividend basics
Consider, for example, Enterprise Products Partners' financial-debt-to-EBITDA ratio of roughly 3.4. That's at the low end among its peer group. It covers its interest expenses by a solid 5 times. In addition, through the first nine months of 2019, it covered its distribution by an incredibly robust 1.7 times (1.2 times is considered strong in for midstream companies). These are the types of things you look at when you are assessing the risk of a dividend cut. Enterprise passes with flying colors.
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To be fair, Enterprise is a slow and steady tortoise. Management tends to raise its distribution by low- to mid-single-digit percentages annually, so investors looking for rapid payout growth won't be too impressed. However, Enterprise has managed to keep the buying power of its distribution growing over time because its annual hikes best the historical rate of inflation. Investors focused on maximizing current income will appreciate that, especially given the stock's high absolute yield.
A strong business
Adding to the allure is the quality of Enterprise's actual business. It is one of the largest midstream partnerships in North America with an over $60 billion market cap. Effectively, it owns and operates the assets that help move oil and natural gas from where they are extracted to where they get refined and shipped. Its portfolio is incredibly diverse, including pipelines, storage, processing, import/export terminals, and shipping assets. The truth is that it would be difficult for any peer to replicate what Enterprise has to offer its customers.
Although it is tied to the energy sector, it isn't much exposed to oil or natural gas prices. Roughly 85% of Enterprise's gross operating margin is derived from fees. Essentially, it gets paid for the use of its assets. As long as there is demand for petrochemical energy, which its customers are confident will continue for decades, Enterprise should continue to do well regardless of what a barrel of crude costs.
There is growth potential built into its operations, too. For example, many of the contracts that Enterprise signs for the use of its assets include regular price increases. On top of that, it has a solid history of investing in its business. That includes $26 billion worth of acquisitions since its IPO in 1998 and, perhaps more important, $46 billion in new construction. Right now, it's working on roughly $9 billion worth of projects that should support future distribution growth once they come online.
So far there is a huge amount to like about Enterprise. Now, let's consider its largest potential negative as an investment (other than its position in the oil-and-gas industry, which might turn off ESG investors looking to avoid carbon-intensive businesses). Enterprise is a master limited partnership (MLP), which comes with some tax headaches.
For example, MLPs really aren't a good fit for tax-advantaged retirement accounts, and you'll have to deal with a K-1 form come tax time. The reason for these complications is that investors are treated as part owners of an MLP for tax purposes. That does provide some benefits -- notably, a portion of the distribution gets shielded from current taxation because things like depreciation are "passed through" to unitholders. However, you'll probably want to consult a tax advisor if you decide to invest in Enterprise.
And to be clear, the MLP thing isn't a flat negative. It's more complicated than that, and some investors might even see it as a net positive. Moreover, as you can see below, Enterprise boasts a lower valuation than many of its peers.
EPD PE Ratio data by YCharts
A total package
No investment is perfect, so asking Enterprise to live up to that standard isn't reasonable. However, when you look at its impressive list of positives, the company's story quickly becomes pretty enticing. Dividend investors listing the qualities of a great high-yield stock would probably include most of what Enterprise has to offer. Now add to that the fact that its units are still around 30% below the highs they reached in 2014, and it starts to look like a bargain, too. Indeed, its P/E is below those of some of its closest peers. If you are dreaming of dividends and bargains, Enterprise should probably be on your buy list today.
