Enterprise Products Partners (EPD 1.73%) has steadily grown its distribution. This year will be the master limited partnership's (MLP) 25th year of increasing its payout. It currently yields an attractive 7.7%.
The midstream company expects the payout to continue heading higher. That was evident in its management team's comments on the first-quarter conference call. While they didn't commit to a specific growth target, they've grown the distribution faster in recent years, which likely continues.
NYSE: EPD
Key Data Points
A reacceleration in recent years
Randy Fowler, Enterprise Products Partners' CFO and co-CEO, discussed the distribution on the quarterly call. He pointed out that the company recently declared its quarterly distribution, which was 5.4% above the payment in the prior year period. Fowler also said that the MLP "will evaluate another increase midyear."
Later on during the call, UBS analyst Brian Reynolds asked if the company could talk about the distribution outlook and expectations. He noted that the company had been growing the payout in the range of 1% to 5% per year since 2018. Meanwhile, its leverage ratio is down to 3.0 times (within its 2.75-3.25 times target range). Further, the business produces $1 billion of free cash flow each year after paying dividends and covering its capital spending. That led the analyst to ask if we could see future distribution growth above 5%.
Fowler addressed this query. He noted that the company had limited distribution growth from 2017 to around 2021 as it transitioned from an external funding model to internally financing its growth capital projects. However, "over the last two years, we have grown more in the range of, call it, 4% to 6%." So, the company's distribution growth rate has reaccelerated more recently.
More growth ahead
Fowler then discussed what's ahead for the MLP. He stated, "We've demonstrated good EBITDA growth." Its earnings grew by nearly $1 billion last year to more than $9.3 billion. Meanwhile, Fowler noted that Enterprise: "has $3.8 billion worth of projects going into service for the remainder of the year. That gives us good cash flow growth that'll support distribution growth down the road."
Fowler didn't want to commit to a specific growth rate on the call since management hadn't met with the board to discuss the mid-year raise. However, he did say, "I think we'll look to continue to come in and provide distribution growth and buybacks, for that matter, as far as getting capital back to investors." These comments suggest that the company could continue growing its payout in that higher 4% to 6% annual range.
Another factor that drives this view is the company's capital spending plans. Fowler noted on the call that "We currently expect our 2023 growth capital expenditures will be in the range of $2.4 billion to $2.8 billion, which includes possible expenditures associated with projects under development and not yet sanctioned." However, he commented, "Frankly, I have a hard time seeing us get to the upper end of this range." Meanwhile, it sees capital spending in the range of $1.4 billion to $2.5 billion next year. The low-end represents currently approved projects in its $6.1 billion capital backlog (which includes the $3.8 billion of projects it will complete this year). The company has several more projects under development that could push its 2024 capital budget to the high end of the range.
Enterprise Products Partners will likely produce even more free cash flow next year since operating cash flow will grow as its $3.8 billion expansion project wave comes online later this year and start generating cash. At the same time, capital spending could be lower next year. With leverage already on target, Enterprise will have the flexibility to return more money to investors through a higher distribution and its repurchase program.
More raises are on the way
Enterprise Products Partners has a quarter-century streak of growing its distribution. While it slowed its growth rate several years ago as it switched funding models, it has reaccelerated over the past two years. The company seems likely to continue growing its payout at a more accelerated rate in the future, given its financial flexibility and the growth coming down its pipeline. Given its high yield, it's a very attractive option for income-seeking investors.
