Enterprise Products Partners (EPD 0.40%) reached rarified air this month. The master limited partnership (MLP) increased its quarterly distribution, marking the 25th consecutive year of growth. It's one of only a handful of energy companies to reach the quarter-century milestone.
That steady upward trend should continue. Here's why the company hasn't run out of fuel to grow its high-yielding payout.
NYSE: EPD
Key Data Points
Hitting a milestone
Enterprise Products Partners recently declared its second quarter distribution, setting the payment at $0.50 per unit ($2.00 annualized). That's a 2% increase from its first-quarter payment. It's also 5.3% above what it paid during the second quarter of last year. This increase marks the company's 25th consecutive year of distribution growth, which is its entire history as a publicly traded company.
At its recent price of around $26.50 per unit, the new payment pushes its yield up to 7.5%. That's an extremely attractive level for income-seeking investors. It's several times above the dividend yield on the S&P 500 (recently 1.6%). It's also higher than government bonds and bank CDs.
Build on a rock-solid foundation
Enterprise Products Partners has reached rarified air for dividend increases. Its streak is even more impressive because the MLP operates in the volatile energy sector. It's one of only a handful of energy companies to reach the quarter-century mark for dividend growth.
A big driver of the company's ability to achieve this magnificent milestone is the overall stability of its cash flow. Enterprise Products Partners operates a large-scale and diversified portfolio of energy midstream assets, including pipelines, processing plants, storage terminals, petrochemical facilities, and export docks. Most of those assets produce predictable cash flow backed by long-term contracts and government-regulated rate structures. Those frameworks currently supply about 75% of the company's earnings, providing it with a solid income base.
Enterprise Products Partners pays out a conservative portion of its steady income to investors via its distribution. Over the last 12 months, the MLP has produced $8.2 billion of adjusted cash flow from operations. It distributed $4.2 billion of this money to investors. That enabled it to retain significant cash to fund expansion projects and maintain a strong balance sheet.
The MLP currently has a 3.0 leverage ratio, which is in the middle of its 2.75-3.25 target range. That's a low level for a midstream company, giving it one of the highest bond ratings in the sector at A-/Baa1. That high credit rating gives it greater access to lower-cost capital, making it easier to fund organic expansion projects and acquisitions.
The fuel to continue growing
Enterprise Products Partners' robust post-distribution free cash flow and balance sheet capacity gives it lots of financial flexibility to invest in the continued expansion of its midstream network via organic growth projects and acquisitions. The MLP currently has $6.1 billion of commercially secured organic expansion projects under construction that should come online through 2025. Notable expansions include:
- A new petrochemical plant.
- Pipeline expansions.
- Additional natural gas processing plants.
- Additional export capacity.
They provide it with lots of visibility into its future cash flow growth.
Meanwhile, it has many more projects under development. For example, it's seeking to build the Sea Port Oil Terminal (SPOT), an offshore oil export facility that would more quickly, safely, and cost-effectively export crude oil from the U.S. Gulf Coast. Enterprise is also working on a couple of potential carbon capture and sequestration solutions.
In addition to organic growth, Enterprise Products Partners has ample financial flexibility to make accretive acquisitions as opportunities arise. For example, last year, it spent $3.2 billion to acquire Navitas Midstream, giving it a foothold for natural gas gathering, treating, and processing in the Midland Basin side of the resource-rich Permian Basin. The MLP also spent $160 million to opportunistically purchase 580 miles of pipelines to optimize its natural gas liquids and petrochemical systems on the Texas Gulf Coast.
Future expansion projects and acquisitions will grow the company's cash flow, giving it more money to pay distributions.
A well-oiled income-producing machine
Enterprise Products Partners has been a phenomenal passive income producer since its public offering a quarter century ago. The MLP has paid a generous and steadily rising distribution backed by an extremely solid financial profile. With more growth ahead, it's an excellent option for investors seeking an attractive, sustainable, and steadily rising income stream.
