Enterprise Products Partners (EPD 0.21%) operates in the most reliable segment of the energy industry. It is financially strong, has reliable cash flows, and a large yield.
But there's one little problem that may cause investors to pause. Enterprise Products Partners' unit price has rallied roughly 60% over the past five years. Is it still worth buying this master limited partnership (MLP)? The answer is yes, and here's why.
What does Enterprise Products Partners do?
To simplify things a lot, Enterprise is a toll taker. It owns energy infrastructure, like pipelines, that move oil and natural gas around the world. It doesn't care all that much about the price of the commodities it is moving through its system. It cares that it moves as much volume as possible through its systems, collecting fees for every unit of product it moves.
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Oil and natural gas, and the products into which they get turned, are vital to modern life. So even when energy prices are weak and when economic activity is slow, demand for Enterprise's services tends to be fairly strong. The reliable cash flows it generates are used to support the MLP's lofty 6.8% distribution yield. That distribution has been increased every year for 26 consecutive years.
Supporting that hefty yield is an investment grade balance sheet. Adding to the security of the payment is the fact that distributable cash flow covers the distribution 1.7 times over, leaving plenty of room for adversity before a distribution cut would be in the cards.
There's just one small problem: Enterprise is a slow-growth business, and the stock has risen a huge 60% or so in just the past five years. But don't let that put you off.
Enterprise is still an attractive income investment
The rise over the past five years comes after a deep decline during the economic shutdowns that were used to slow the spread of the coronavirus in 2020. That was likely an overreaction, noting that the world has quickly gotten used to living with COVID. That said, it is also important to remember the regular distribution increases that have taken place.
The last time Enterprise's units were trading hands at the current levels, its yield was a far less generous 4% or so. Today, despite the energy business' unit price rally, the yield is 6.8% thanks to its reliable distribution increases. The rise in price not only represented a recovery from an unusual exogenous shock, but also the increase in the distribution.
The key that has driven both of these facts is the slow and steady performance of Enterprise. It has continued to execute well as it builds out its business via modest capital investments, regular fee increases, and the occasional acquisition.
All three are likely to continue in the future, as well. So the business continues to increase in value, which will be shared with unitholders via distribution increases, and likely reflected in the units by a continued upward bias in the price.
Slow and reliable growth is what you get with Enterprise
Enterprise Products Partners is not, and likely never will be, a particularly exciting investment. It is built from the ground up to be a boring high-yield investment. If that is what you are looking for, don't let the price rally deter you from buying this MLP today. The distribution growth that has taken place continues to make this high-yield investment worth buying even as the unit price has climbed higher.
