5 Reasons You Should Buy Enterprise Product Partner Stock Like There’s No Tomorrow
One of the longest holding stocks in my portfolio is a pipeline company. Enterprise Product Partner (EPD -0.53%), which I have owned for over 15 years. Despite owning it for a long time, I’m just as happy to own it today as I was when I first bought the stock.
Let’s take a look at five reasons why we suggest you buy stocks like there’s no tomorrow.
1. Consistency
Enterprise has been one of the most consistent companies over the past 20 years. This happens because we have large, integrated midstream systems with diverse geographies, products, and markets. The company has more than 50,000 miles of pipelines used to transport a variety of hydrocarbons, including natural gas, crude oil and natural gas liquids (NGLs), and more than 300 million barrels of liquids storage. It also owns processing plants, classifiers, petrochemical facilities and deepwater docks.
A company’s assets impact most of its midstream value chain. This helps create a natural hedge for the company as it allows it to direct, store and upgrade its products to create the most value for its customers and the company itself.
Additionally, more than 80% of the company’s business is typically fee-based, so product and spread exposure is modest. Additionally, about half of our fee-based revenue comes from long-term acquisitions or paying customers. This means you earn money regardless of whether your pipelines and assets are used or not.
The company’s business model has seen the company continue to increase its distributable cash flow (DCF) per unit (operating cash flow minus maintenance capital expenditures (capex)) while remaining fairly stable even in challenging environments such as the 2014 oil price crash. I gave it to you. -2016.
Image source: Getty Images.
2. High yield and growing distribution
Enterprise’s consistency has enabled it to increase its distribution for 25 consecutive years. This includes difficult times such as the financial crisis, the oil price crash, and the early days of the pandemic.
The company generates a lot of cash flow and has been able to continuously increase its dividend because it has historically taken a conservative stance through leverage. The current leverage is 3, which is low in the midstream industry. (The company defines leverage as net debt adjusted for equity credit of subordinated subordinated notes divided by adjusted EBITDA).
Enterprise currently has a strong forward yield of 7.2% based on quarterly distributions of $0.515. With a coverage ratio of 1.7 and low leverage over the past 12 months, distribution has performed well and is expected to continue rising over the next few years, extending Enterprise’s current streak.
3. Growth opportunities
Enterprise also plans to accelerate growth after deciding to slow down projects early in the COVID-19 pandemic given the uncertainty at the time. The pipeline company increased its organic growth capital spending by up to $2.9 billion last year and now plans to spend about $3.5 billion on growth projects both this year and next.
It takes time to build and scale projects, so the impact of these projects will only begin to be felt later this year and beyond. The company has typically earned a 13% return on invested capital over the past few years. This means that for every $1 billion spent on growth capital expenditures, total annual operating profit increases by $130 million.
Meanwhile, Enterprise recently announced that, after five years, it had finally secured the critical deepwater port license needed for its proposed Sea Port Oil Terminal (SPOT) project. Once built, this project will transform Enterprise into a significant player in crude oil exports.
Overall, the company is set to enter growth mode again at a time when it has excess cash to spend.
4. Valuation is cheap
Despite its high yields and growth opportunities, Enterprise still trades at a cheap enterprise value (EV) to EBITDA multiple of 9.3. This is one of the most common ways to value midstream stocks because it considers net debt while excluding non-cash expenses.
EPD EV – EBITDA (forward) data from YCharts
This is well below the 15-plus multiples that Enterprise frequently traded at before the pandemic. This is also well below the average midstream master limited partnership (MLP) multiple traded between 2011 and 2016, which was 13.7x. At the time, MLPs had higher leverage and less attractive business models.
5. Deferred tax on dividends
Enterprise has a long history of consistent operating performance and has strong growth projects ahead. Additionally, it offers high yields, increasing distribution, and affordable valuations based on historical standards.
What can make stock investing more attractive? What about tax-deferred distributions?
great. As an MLP, Enterprise pays distributions that are technically considered returns of capital rather than dividends. The capital return portion of the distribution is tax-deferred and lowers the owner’s cost basis, so it is not taxed until the shares are sold.
This benefit is now available to investors once they are issued a K-1 tax form at the time of filing their taxes. However, this additional form is only a minor inconvenience and can usually be easily handled by your accountant or tax program. Tax-deferred distributions are worth the extra paperwork.
