Enterprise Products Partners (EPD 0.45%) is a boring company. The master limited partnership (MLP) operates an array of pipelines, processing plants, petrochemical complexes, storage terminals, and export facilities. Those are not the most exciting investments.
However, here's where things get exciting. Since its initial public offering in 1998, it has delivered a total return of more than 2,400% (13.9% annualized). That result pulverized the S&P 500, which produced a mere 471% total return (7.3% annualized) over the period. Looked at another way, Enterprise Products Partners would have grown a $1,000 investment made at its IPO price into around $25,000 today. That same investment in an S&P 500 Index fund would have only grown to $5,713.
The company has plenty of capacity to keep on generating attractive returns for investors, which is why it would be a smart stock to invest $1,000 in right now.
Enterprise Products Partners' secret sauce for investing success
The primary driver of Enterprise Products Partners' robust returns has been its lucrative cash distribution, which at the current share price yields 7.3%. A new $1,000 investment would generate $73 of annual passive income at that rate -- a nice base return for shareholders. The MLP has an excellent track record of growing its quarterly payment to investors. The pipeline company has increased its distribution level 75 times since its IPO and for 24 straight years.
That steady growth matters. Companies that habitually boost their dividends have, as a class, historically delivered superior total returns to those that don't.
|
Dividend Status |
Average Annual Total Return |
|---|---|
|
Dividend growers and initiators |
10.2% |
|
Dividend payers |
9.2% |
|
Equal-weight S&P 500 index |
7.7% |
|
No change in dividend policy |
6.6% |
|
Dividend cutters and eliminators |
4% |
|
Dividend non-payers |
(0.6%) |
Data source: Ned Davis Research and Hartford Funds. Note: Returns data from 1973-2022.
The foundation for continued growth
Enterprise Products Partners should be able to continue increasing its distribution, and the company's uber-conservative financial profile is a big reason why. The MLP's large-scale and diversified midstream operations generate lots of stable cash flows that are backed by long-term contracts and government-regulated rate structures. The company produced nearly $7.8 billion of distributable cash flow last year, enough to cover its payout by about 1.9 times. That allowed it to retain a substantial amount of cash.
The MLP uses its retained earnings to help fund further expansion, investing in both organic capital projects and acquisitions. Last year, the company invested $1.4 billion into growth projects, acquired Navitas Midstream for $3.2 billion, and spent an additional $160 million to purchase other pipelines and related assets. Enterprise used its strong balance sheet to complement retained cash flow in funding those expansion-related investments.
Even with that heavy investment in its growth, the company ended the year with a top-tier balance sheet. It has a strong credit rating (A-/Baa1) backed by a low leverage ratio of 2.9 times debt-to-EBITDA, which is toward the low end of its target range of 2.75 times to 3.25 times. That gives it tremendous flexibility to continue making growth-related investments.
Enterprise Products Partners already has several expansion projects lined up. It currently has $6.1 billion of major capital projects under construction that should enter service by the end of 2025. It expects to fund about $2.5 billion of investments this year. That capital project backlog provides it with visible growth for the next few years.
Meanwhile, the MLP has the flexibility to capitalize on additional expansion opportunities as they emerge. It can make acquisitions and invest in more organic expansions. The company has several potential projects in the pipeline. It's working to develop a large-scale offshore oil export terminal in Texas. It's also working on some carbon capture and sequestration (CCS) projects. CCS is potentially a multitrillion-dollar market opportunity. The company's ability to capture additional expansion opportunities would provide it with more cash to grow the distribution in the future.
A solid investment proposition
Enterprise Products Partners' lucrative distribution provides investors with a nice base return, and the company has a long track record of payout growth that it should keep building on. Because of that, there's a strong probability that it can continue producing market-beating total returns. That makes it a smart stock to invest $1,000 in right now.
