Energy prices collapsed during the early days of the coronavirus pandemic in 2020. Just about everything that touched the industry nosedived, including Enterprise Products Partners (EPD -0.31%). It turned out to be a great buying point in an industry historically prone to swift and dramatic price swings. Only, when it comes to Enterprise, there are some important things to remember that make it stand out, and the math of figuring out total returns will help you see the key takeaway.
How much?
If you had bought $10,000 worth of units in Enterprise Products Partners on March 16, 2020, they would be worth roughly $17,650 today (master limited partnerships, or MLPs, like Enterprise trade in units, not shares). That's a pretty generous return of 76% or so in a touch over two years. This is, frankly, how most investors look at returns, but it isn't the best way to consider this midstream giant's performance.
That's because you also need to take into consideration Enterprise's yield. MLPs are specifically designed to pass income on to unitholders and generally have notable distribution yields. Enterprise's yield was 7.6% as of Thursday's close. It was over 14% during the worst of the pandemic bear market. When you add reinvested distributions to the return calculation, that $10,000 investment would today be worth around $21,400 -- a roughly 115% total return.
That's the magic of reinvesting dividends, or distributions in the case of an MLP. Indeed, even modest dividends can produce magical results over long enough periods of time. Notably, despite a recent unit price pullback, the total returns from Enterprise Products Partners are far more generous than those of the S&P 500 Index over the same span.
Safety first
There's an important piece here, however, that you must consider. And that's the safety of the distribution. Buying a high yield won't do you much good if the yield isn't sustainable. This is actually where Enterprise shines particularly brightly.
Unlike a company like ExxonMobil, where the top and bottom lines are tied directly to oil prices, Enterprise operates a large collection of midstream assets. These are the pipelines, storage, processing, and transportation equipment that help move oil and natural gas, with companies generally charging fees for their use. Commodity prices aren't nearly as important to performance. It's worth noting that there were very real concerns about Exxon's dividend being cut, especially after peers Shell and BP clipped their payouts.
In the first quarter of 2022, Enterprise's distributable cash flow covered its distribution by a huge 1.8 times. Clearly, there's little to worry about on the distribution front today, noting that the partnership's balance sheet is among the strongest of its peer group. In fact, Enterprise could probably handle a fair bit of adversity before the distribution would be at risk.
But what did distribution coverage look like in 2020? In April 2020, Enterprise reported its first-quarter results, including a distribution coverage ratio of 1.6 times. Coverage was 1.6 times for full-year 2020 as well. While that's not quite as good as 1.8 times, 1.2 times was historically considered strong in the midstream space. So even during the worst of the pandemic, there was little to worry about here.
In other words, if you had the wherewithal to step in while other investors were throwing the baby out with the bathwater, you could have added a high-yield gem to your portfolio. Clearly, if you used those distributions to pay for living expenses, your performance wouldn't be quite as high as if you reinvested them. But even in that situation, your $10,000 investment would have generated around $1,400 a year in distributions with little risk of a cut. That's a pretty solid outcome, too.
Still attractive
Investors have bid up the prices of energy-related stocks now that oil prices have rebounded. However, with a still sizable yield and extremely well-covered distribution, conservative income investors might want to take the time to dig in here. And if you have more of a value bent, Enterprise might still be one to keep on the wish list, just in case a steep market drop pushes the price down and the yield up again.
