The big attraction of Enterprise Products Partners (EPD 0.45%) today is probably its huge 7.4% distribution yield. But a high yield alone isn't enough to make this midstream giant a buy in the economically sensitive energy industry. That said, its 25-year streak of annual distribution increases might be a good reason to own it if you are the type of investor that wants a safe income stream. Here's what you need to know.
Enterprise has proven it can survive economic downturns
Recessions are a part of the business cycle, and there's nothing you can do to avoid them. The best you can hope for is to own stocks that are resilient during these deep economic pullbacks. There are any number of ways to assess a company's ability to withstand a recession, but for dividend investors, a simple one is to examine their dividend history. Simply put, you want to own businesses that have a history of increasing their dividends in both good and bad markets. As noted, Enterprise has a pretty strong track record on that front.
EPD Dividend data by YCharts
But what's interesting is that flipping the calendar back 25 years takes the distribution back to before the year 2000. That means that this master limited partnership (MLP) has increased its distribution through three recessions, including the Great Recession between 2007 and 2009. That shows a huge amount of income resilience.
An important part of the backstory here is the MLP's midstream focus. Essentially, Enterprise owns the energy infrastructure used to move oil and natural gas around the world. The broader energy industry simply can't operate without this vital infrastructure. That said, Enterprise is a toll taker, charging fees for the use of its assets. So cash flows tend to be resilient no matter what the environment is, given the importance of energy to modern life. However, there's a little more to understand than this considering that most of the midstream sector shares these traits.
Enterprise is focused on being reliable
You can't simply expect the past to repeat itself. Thus, Enterprise's ability to continue increasing its distribution right through the last three recession is good to see, but not, in and of itself, a reason to buy the MLP. And while that high yield is attractive, it could also be a sign of risk. You need to take a closer look before buying. Luckily, Enterprise holds up to scrutiny.
For starters, Enterprise has an investment-grade balance sheet. So its financial foundation is sound. But there's more to this story, given that Enterprises' debt-to-EBITDA ratio is among the lowest of its closest peers. That's not a one-time thing, either; Enterprise is generally among the least-leveraged midstream players. That puts it in a good position to weather recessions better than roughly similar midstream companies.
EPD Financial Debt to EBITDA (TTM) data by YCharts
Then there's Enterprise's distribution to consider. In the third quarter of 2023, trailing-12-month distributable cash flow covered the distribution by a huge 1.7 times. There are others in the industry with similarly strong distribution coverage, but that doesn't minimize the fact that Enterprise has a lot of leeway to deal with an economic downturn before a distribution cut would be needed. Add that to the strong financial foundation, and you can see why Enterprise might be an attractive income investment for those worried about surviving future economic downturns.
Enterprise is a safe-haven investment
Enterprise isn't perfect. The high yield is a reflection of the fact that there are only modest growth prospects ahead, meaning the distribution will make up the lion's share of your return over time. However, if you are looking to maximize the income your portfolio generates, that probably won't matter too much to you. And then you can add its proven track record through three recessions, strong balance sheet, and robust distribution coverage to the story. All told, if you are looking for safe income, Enterprise should probably be at the top of your wish list.
