A big yield isn't enough to make a dividend stock a good buy. But income investors will find Enterprise Products Partners (EPD +0.83%) something of a no-brainer since it marries a big 6.2% yield with attractive business fundamentals. Here's a quick look at some of the best features this midstream giant offers.
1. Consistent business
Big yields are great, but they are only attractive if they can be sustained. That requires a business that is reliable in good economic times and bad. Enterprise is one of the largest midstream companies in North America. It basically owns the pipelines, storage, transportation, and processing assets that help to move oil and natural gas around the world. The vast majority of its operations are backed by fees, which have to be paid regardless of the price of the products moving through its system. Cash flows are very reliable.
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2. Plenty of cash flow
This brings up another key point -- distribution sustainability. In the third quarter, Enterprise's distributable cash flow covered its distribution by a huge 1.8 times. There's a lot of leeway for adversity in that number before the master limited partnership (MLP) would have to consider cutting the distribution. In fact, given the coverage, it's far more likely that increases are in order.
3. Plenty of time
The world is looking to shift toward cleaner energy alternatives, which is a long-term threat to Enterprise's business. However, the International Energy Agency (IEA) is projecting demand for oil and natural gas to increase until at least 2040. And even at that point, demand isn't likely to fall off a cliff; a slow and steady decline is more likely. This means decades of demand for Enterprise's assets and plenty of time to potentially repurpose assets to transport things like biodiesel.
4. Rock solid
The MLP, meanwhile, isn't a big risk-taker. Its balance sheet is investment-grade rated and its debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio is at the low end of its comparably sized peer group. Safety first is a key financial priority.
ENB Financial Debt to EBITDA (TTM) data by YCharts.
5. Rewarding investors well
Enterprise's generous 6.2% distribution yield is a key part of the story here. That is very attractive compared to other energy stocks, especially in light of the MLP's financial strength and business consistency, and relative to the broader market. However, it's just one part of the dividend story. Enterprise has also increased its distribution annually for 24 consecutive years and, as noted above, there's very little reason to expect this streak to end.
NYSE: EPD
Key Data Points
6. Looking to the future
Meanwhile, the partnership has $5.5 billion in growth projects lined up that will boost distributable cash flow as they come online over the next three years or so. The investments are heavily focused on natural gas and refining. Natural gas is expected to be a transition fuel as the world moves toward cleaner energy sources, notably replacing dirtier coal. Refining is also increasingly important, noting that gasoline is just one of the many things into which oil and natural gas get turned. So Enterprise is spending on projects that should help position it to benefit from long-term industry trends.
Don't sleep on this yield
No investment is perfect, and Enterprise does come with some warts. The most notable is that ESG investors will hate its carbon fuel focus. However, if you think about the long-term trends in the energy sector, Enterprise looks incredibly well positioned as a business. Add in the high yield, and it starts to look like a no-brainer investment for dividend-focused investors looking to add energy exposure to their portfolios.
