Enterprise Products Partners (EPD 0.45%) is a passive income-producing machine. The master limited partnership (MLP) has increased its distribution to investors for 25 straight years, its entire history as a public company. Its most recent increase of 2% earlier this month pushed its yield up to 7.5%.
It could turn a $1,000 investment into $75 of annual passive income at that rate. That's several times the rate an investor would earn in an S&P 500 index fund ($15 of annual dividend income at the current 1.5% dividend yield).
The energy midstream company has plenty of fuel to continue growing its prodigious payout. That makes it a great way to turn idle cash into an attractive passive income stream.
A cash flow machine
Enterprise Products Partners has generated $8.2 billion in cash flow from operations over the last year. That has covered its cash distributions to investors with $4 billion to spare. This relatively low payout ratio enables the MLP to retain lots of cash. It uses the money to fund expansion projects ($2.1 billion over the past year), maintain a strong balance sheet ($900 million of debt reduction), and return additional capital to investors ($300 million of repurchases).
Last year wasn't an outlier. The company has a long history of generating durable cash flow through a range of market conditions:
Image source: Enterprise Products Partners.
A big driver of its resilient cash flow is its lower volatility revenue streams. Fee-based sources like long-term fixed-rate contracts and government-regulated rate structures supply about three quarters of its earnings. That gives it a very stable base of cash flow and helps mute some of the impacts of commodity price volatility.
Enterprise Products Partners complements its stable cash flow with an elite balance sheet. The MLP has the highest bond rating in the midstream sector at A-/Baa1. It backs that strong credit rating with a low leverage ratio of 3 times (in the middle of its 2.75-3.25 times target range). That excellent balance sheet gives it the additional financial flexibility to capitalize on value-enhancing opportunities as they arise.
Plenty of fuel to continue growing
Enterprise Products Partners' financial flexibility allows it to continue investing in growing its midstream platform. It made a total of $5.2 billion of investments in 2022. It spent $3.2 billion to acquire Navitas Midstream, invested $1.4 billion into growth capital projects, purchased $160 million of pipelines and related assets, and spent $372 million on sustaining capital projects. These investments enhanced its operations and grew its cash flow.
The MLP ended the first quarter with $6.1 billion of major capital projects in its backlog, including $3.8 billion that should enter service and start generating cash flow by the end of this year. The pipeline company recently began commercial service on its Poseidon natural gas processing plant in the Midland Basin, its sixth in the region. It already has another one under construction that should start up in the first quarter of 2024. These plants were part of the assets it acquired in the Navitas deal last year.
The upcoming wave of capital projects will supply the company with incremental cash flow, giving it more money to distribute to investors. It has already boosted its payout by 5.3% over the past year, including by 2% earlier this month. Its current capital project backlog will supply it with plenty of fuel to continue increasing the payout over the coming years.
Meanwhile, the company has more projects in the pipeline to fuel future growth. Its strong position in the Permian will enable it to capitalize on the region's growth. It's also pursuing opportunities to expand its export capabilities, grow its petrochemical business, and capitalize on the vast opportunity for lower-carbon energy. In addition to organic expansion projects, Enterprise has the financial flexibility to make accretive acquisitions as opportunities arise.
A top-notch income investment
Enterprise Products Partners is an elite passive income investment. The MLP pays a high-yielding distribution that it has steadily grown for years. That trend should continue, given its strong financial profile and the visible growth coming down the pipeline. That makes it an excellent option for income-seeking investors.
