Units of Enterprise Products Partners(NYSE: EPD) have risen about 10% in 2024, which might have some investors wondering if they have missed the opportunity to buy this high-yield midstream giant. The quick answer is no: There are still plenty of reasons to buy the master limited partnership (MLP) and its lofty 7% distribution yield. Here's what you need to know.
Enterprise moves oil, it doesn't drill for it
Perhaps the most important thing to understand about Enterprise Products Partners is that it operates a midstream business. This includes vital energy infrastructure assets like pipelines, storage, transportation, and processing facilities. Midstream companies effectively connect the upstream sector (drilling) and the downstream (refining and chemicals) to each other and the rest of the world.
Image source: Getty Images.
The key to the midstream sector is that it is largely a toll-taker business. In other words, Enterprise gets paid for the use of its irreplaceable assets. The price of the commodities that flow through its system is far less important to the MLP's top and bottom lines than demand for energy, which tends to remain robust regardless of the price of oil, natural gas, and the commodities into which they get turned.
The dynamics of the midstream sector lead to consistent cash flows to support Enterprise's attractive 7% distribution yield. That is lower than it was when the unit price was 10% lower, but it is still notably above what you could collect from an S&P 500 index fund (1.3%) or the average energy stock (2.9%), using the Vanguard Energy Index ETF as an industry proxy.
And that's the biggest story here: Enterprise remains an attractive income stock even after a healthy price advance.
Enterprise's distribution should keep growing
That said, Enterprise's distribution yield is clearly not quite as alluring as it was when the unit price was lower. And yet there are still very good reasons to buy in, even at these (very slightly) less attractive yields.
For example, it has one of the strongest balance sheets in the midstream sector. Not only does the MLP earn an investment-grade rating, but its ratio of debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) of 3.1 times is also lower than any of its closest peers. That means it has a rock-solid financial foundation.
EPD financial debt to EBITDA (TTM); data by YCharts; TTM = trailing 12 months.
Then there's the distribution itself. Enterprise has increased the payment annually for 25 consecutive years, showing a clear commitment to unitholders. Also, in 2023, the MLP's distributable cash flow covered the distribution by a very strong 1.7 times. A lot would have to go wrong before the distribution would be at risk of being cut.
Meanwhile, there's good reason to believe that the distribution will continue to rise over time. First off is the obvious commitment to regular annual increases. But there are also price increases built into Enterprise's contracts.
And then you have to consider the cash flows that will come on line as the MLP completes its $6.8 billion worth of capital investment projects. That spending is scheduled to last until 2026, but history suggests there will be more projects lined up as current projects are completed. Enterprise is also large enough, and financially strong enough, to be an industry consolidator.
You are buying Enterprise for the yield
The truth is that this is a fairly boring business, and the yield will likely make up the vast majority of your return over time. But that's the point of this MLP: It is a yield-focused investment.
Given that the yield is still attractively high relative to other options, that Enterprise Products Partners is financially strong, and that it has slow and steady growth lined up via its capital investment projects, income investors should still feel comfortable buying even after the recent 10% price advance.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge and Kinder Morgan. The Motley Fool recommends Enterprise Products Partners and Tc Energy. The Motley Fool has a disclosure policy.
