The stock market has been excruciatingly volatile this year. We've experienced some of the biggest market drops in years and one of the largest rallies since World War II. Amid all those ups and downs, the S&P 500 has fallen nearly 13% while the Nasdaq has plunged almost 17%, driven down by concerns that tariffs could cause a recession.
While you can't completely eliminate market volatility from your portfolio, you can help reduce its sting by building a more resilient portfolio. Investing in a durable company like Enterprise Products Partners (EPD +1.19%) is one way to do this. Here are four reasons it can help protect your portfolio during market storms.
NYSE: EPD
Key Data Points
Recession resistance
Enterprise Products Partners is one of the country's largest energy midstream companies. It operates critical energy infrastructure that transports, processes, stores, and exports various energy commodities. While energy prices typically decline during an economic downturn, demand tends to be relatively stable.
That's important to note, because Enterprise Products Partners has a demand-based business model. Furthermore, most of its assets operate either under long-term, fixed-rate contracts or government-regulated rate structures. It therefore gets paid the same fee regardless of the price of the commodities flowing through its midstream network and produces durable cash flows that tend to be highly recession-resistant.
Inflation protection
One of the many concerns about tariffs is that they could cause stagflation, a situation gthat occurs when inflation remains elevated while economic growth stagnates. Enterprise Products Partners' business model insulates it from inflation because about 90% of its long-term contracts have escalation provisions that lessen the effect of inflation on its cash flow. That helps further enhance the durability of its cash flow.
A conservative financial profile
Economic downturns have a greater impact on financially weaker companies. Recessions can reduce corporate revenue and cash flows, which many companies can't bridge with their more fragile balance sheets.
Enterprise Products Partners, on the other hand, is a financial fortress. It's the only midstream energy company with A-rated credit. That enables it to borrow money at lower costs and at better terms than its rivals with lower ratings. The company currently has a debt portfolio with a low fixed rate -- 98.2% fixed at an average rate of 4.7% -- with an average remaining debt maturity of 18 years. That helps insulate it from higher rates if inflation ticks up.
It also has a very low leverage ratio of 3.1, compared with the 3.5 to 4.5 target range of most other midstream companies. That gives it additional financial flexibility to borrow money during downturns to capitalize on opportunities such as making accretive acquisitions and approving additional organic expansion projects.
Consistent, cycle-tested cash distributions
Enterprise Products Partners' ability to generate resilient, inflation-protected cash flows enables it to pay a lucrative and durable distribution to investors. The master limited partnership (MLP), which sends its investors a Schedule K-1 Federal Tax Form each year, currently has a distribution yield of 7.2%. That's much higher than the broader market; the S&P 500 yields less than 1.5%. That high-yielding payout provides investors a tangible base return throughout the economic cycle.
The MLP has proved the durability of its distribution over the decades. Last year was the 26th consecutive one that Enterprise Products Partners raised its distribution payment. That period included several severe recessions, showcasing the resilience of its business model and cash flow.
Enterprise Products Partners is in an excellent position to continue increasing its distribution even if we experience a major recession in the next few years. The MLP currently has $7.6 billion of major capital projects under construction that should come online through the end of next year, with $6 billion slated to enter commercial service this year. Those projects will supply it with significant incremental cash flow to support distribution growth over the next few years, especially considering it has a very conservative dividend payout ratio. The MLP covered its distribution with cash flow by 1.7 times last year.
Build a more resilient portfolio with Enterprise Products Partners
Enterprise Products Partners is a durable company. It generates stable cash flow, has a conservative financial profile, and pays a durable and growing distribution. That high-yielding payout provides a tangible cash return even during a downturn, while the MLP's unit price should be much less volatile than the broader market. It can help prevent your portfolio's value from plunging too far during recession-driven market downturns.
