Here's Why Enterprise Products Partners Is a No-Brainer Midstream Stock

Enterprise Products Partners (EPD 0.45%) has a very attractive distribution yield of 7.3%. But a big yield alone doesn't make an excellent investment, noting that there are plenty of high yields that end up being little more than yield traps. Only Enterprise isn't your run-of-the-mill income stock. Here are a few reasons why the passive income stream you can collect here is a no-brainer in the midstream sector.

1. Enterprise is a giant

While Enterprise isn't the largest energy midstream player in North America, it is pretty close to it. In fact, it is notably larger than most of the biggest names in the industry, as the market cap chart below shows.

EPD Market Cap data by YCharts.

Being big isn't by itself a good reason to like a company. However, scale does come with advantages in the capital-intensive midstream sector. The core of this niche of the energy business is owning large and expensive assets (like pipelines), then charging fees to customers for the use of those assets. Construction, financing, and acquisitions can all get easier as scale increases. Given its size, Enterprise can do things that smaller operators can't.

2. Enterprise is financially strong

Perhaps the most important complement to size is having a rock-solid balance sheet. Enterprise has among the lowest debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratios among its closest peers. That's the norm, not an oddity, as management has long focused on being fiscally prudent. 

EPD Financial Debt to EBITDA (TTM) data by YCharts.

Having low leverage provides a backstop for the master limited partnership's (MLP's) big yield. But the key is that it affords Enterprise flexibility. In weak patches, it can lean on its balance sheet for cash to support its operations and the distribution. In good times it has ample firepower to invest in its business. Enterprise generally has enough financial flexibility to ride the energy industry's typical ups and downs.

3. Huge coverage for Enterprise's distribution

The next big reason to like Enterprise in the midstream space is that its distributable cash flow covers its distribution by a solid 1.8 times. The MLP is a slow and steady performer, so the yield will likely represent the lion's share of a unitholder's returns. The large distribution coverage ratio means that a lot can go wrong before a distribution cut would be on the table. But just like financial strength, strong coverage isn't new for Enterprise.

Data source: Enterprise Products Partners.

The big picture here is that Enterprise clearly believes in being fiscally prudent in all the things it does. That includes ensuring the distribution, likely the most important component of an investor's return here, is sustainable over time. 

4. Enterprise keeps rewarding unitholders

So Enterprise is an industry-leading business with a strong financial foundation and a well-covered (and attractive) yield. There's a lot to like about Enterprise today. There's one additional number to note: 25.

EPD Dividend Per Share (Annual) data by YCharts.

That's the number of consecutive years in which Enterprise has increased its distribution. While it may seem obvious, it is worth stating: Enterprise places a high value on rewarding unitholders with regular distribution growth. That's a commitment that midstream investors should appreciate, given that some of the MLP's peers have resorted to dividend cuts in the not-too-distant past, including Kinder Morgan (NYSE: KMI) and Energy Transfer (NYSE: ET). If consistency is important, Enterprise is a clear winner.

Enterprise checks the boxes

As noted, Enterprise isn't going to wow you with growth. Most of the attractive midstream investment opportunities have been developed in North America. But it should be a consistent and reliable income stock for years to come. That's pretty much the ideal in the midstream niche, making it a go-to investment option for even the most conservative income investors.