Enterprise Products Partners (EPD 0.45%) offers investors a big-time, passive-income stream. The master limited partnership (MLP) currently yields 7.6%. That's multiples above the 1.7% dividend yield on an S&P 500 index fund.
This ultrahigh-yielding payout is on an extremely secure foundation. That was evident from comments made by the company's management team on its first-quarter conference call.
A well-covered payout
Enterprise Products Partners produces significant cash flow to cover its big-time distribution. Jim Teague, the MLP's co-CEO, stated on the Q1 call that "We generated $1.9 billion of distributable cash flow (DCF), providing 1.8 times coverage" for the distribution. As a result, the co-CEO noted, "We retained $863 million of DCF for the first quarter." That gave the company money to fund expansion projects and strengthen its already elite balance sheet.
Randy Fowler, Enterprise's CFO and its other co-CEO, drilled down a bit deeper during the call into its cash flow and capital allocation. He stated:
For the 12 months ending March 31, 2023, Enterprise paid out approximately $4.2 billion of distributions to limited partners. In addition, we also repurchased $267 million of common units off the open market. As a result, our payout ratio of adjusted cash flow from operations was 55% for this period, and our payout ratio of adjusted free cash flow was 75% for this 12-month period. Total capital investments in the first quarter of 2023 were $654 million, which included $570 million of organic growth capital projects and $84 million of sustaining capital expenditures.
As seen in the following slide, Enterprise Products Partners produces ample cash to cover its distribution and capital program with room to spare:
Image source: Enterprise Products Partners.
As that slide shows, the company only used three-quarters of its adjusted free cash flow to fund expansion projects and return capital to investors via the distribution and unit-repurchase program over the past year. That supplied it with excess cash, $900 million of which it used to repay debt.
It's also worth pointing out that the company produces very durable cash flows. Fee-based earnings from long-term contracts and government-regulated rate structures supply about 74% of the company's gross operating margin, providing it with a very solid base of cash flow.
A fortress-like balance sheet
The company's debt repayment has fortified an already elite balance sheet. Fowler stated on the call:
We ended the quarter with a consolidated leverage ratio of 3.0...Earlier this year, we announced a lower leverage target of 3.0 times plus or minus a quarter in a range from 2.75 times to 3.25 times. This change in financial policy, our lower leverage, along with an established track record of growing stable fee-based cash flows and strong credit metrics resulted in Standard & Poor's upgrading our senior unsecured credit rating to A- with a stable outlook.
Fowler made two key points. The company ended the quarter with a leverage ratio within its target range, which it lowered earlier this year. That policy change and its other strong financial features gave a credit rating agency the confidence to award the MLP with A-rated credit. Fowler stated that Enterprise Products Partners is now the only midstream energy company with an A credit rating. That higher credit rating gives it even greater access to lower-cost capital, a competitive advantage in a market where credit is tightening.
The CFO also pointed out that Enterprise Products Partners' balance sheet is comprised almost entirely of long-term, fixed-rate debt. It has an average remaining term of about 20 years, helping insulate it from rising rates. It also has about $4 billion of liquidity, giving it tremendous financial flexibility.
Meanwhile, leverage is on track to head even lower in the future. Enterprise Products Partners has $3.8 billion of expansion projects that will go into service later this year. They'll grow its earnings, causing its leverage ratio to decline. That will give it more financial flexibility, which it could use to capitalize on acquisition opportunities or return additional cash to investors via faster distribution growth or increased unit repurchases.
A super low-risk, passive-income stream
Enterprise Products Partners offers investors a high-yielding payout backed by a low-risk business model. It generates more cash than it needs to cover its distribution and expansion program, enabling it to further strengthen an already elite balance sheet. These factors make Enterprise Products Partners an ideal option for investors seeking a rock-solid, passive-income stream.
