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Home / Business / Enterprise Products Partner: Time to buy this top-of-the-line dividend? – Company Products Partner L.P (NYSE: EPD)

Enterprise Products Partner: Time to buy this top-of-the-line dividend? – Company Products Partner L.P (NYSE: EPD)



Enterprise Products Partners L.P. (NYSE: EPD) is at the top of my list of dividend generators, but the units always looked a bit expensive. At least until the stock market offered its last fire sale.

The partnership owns one of the country's largest pipeline networks, in addition to a number of terminals, processing facilities and energy storage facilities. Investors have long valued these assets for their bond-like cash flows and oversized profit margins. And thanks to the booming slate production in America, the pipeline owners have taken money into their hands.

At least investors have praised pipelines like Enterprise. In recent years, dealers have turned from the oil field. They want to hunt faster returns in cryptocurrencies and technology stocks. More recently, new regulations threaten to end the tax benefits of investing in master limited partnerships.

The good news here? For income hunters, the sell off could have created a chance to sell enterprise units at bargain prices. Of course, let's take a deeper look at this dividend.

Is it safe?

The enterprise remained a conservative and rational administrator of the capital.

Historically, management has retained enough money to invest in its business limiting dependence on dilutive stocks or risky bonds. Last year, the partnership generated $ 4.5 billion in cash flow and paid $ 3.6 billion in distributions. This 80% payout ratio leaves more than enough room for maneuver. Management should continue to make payments to shareholders in the event of an industrial downturn.

Year

Resale Cash Flow

Distributions

2017

$ 4,502 million

$ 3,569 million

2016 [19659012] $ 4,102 million

$ 3,301 million

2015

$ 5,607 million

$ 2,944 million

2014

$ 4,079 million

$ 2,638 million

2013

$ 3,750 million

$ 2,400 M

Source: Enterprise Product Partners Investor Relations

The conservative approach of Enterprise also applies to the balance sheet. Management has only borrowed $ 2.90 in debt for each dollar generated in adjusted EBITDA. In addition, executives have committed most of these outstanding liabilities (over 90% in the last quarter) to fixed rate long-term debt. This leverage ratio is well below that of other pipeline owners in the industry (who tend to be more aggressive). Managers have a lot of maneuvering space.

Conservative investors should like this approach. The oil spill is a cyclical, volatile business. Over the last few years, dozens of companies have been in debt – resulting in painful dividend cuts for their investors. You must applaud Enterprise's prudent approach of achieving consistent, steady returns.

Will it grow?

Enterprise's slow and steady pace of dividend increases has made the partnership a favorite among income investors. Since going public in 1998, management has increased disbursement almost every quarter in the mid-single-digit range. Several catalysts should allow executives to maintain this growth rate for the foreseeable future: Free Growth: The company's vast midstream network connects several large service areas to almost every refinery east of the Rocky Mountains. With additional terminals, storage facilities and processing facilities, the partnership offers customers many opportunities to maximize the value of their production. Over time, the volumes in this network should grow slowly but inexorably. The company's near monopoly position should also allow management to raise prices at or above the inflation rate.

Natural Gas Liquids: In the energy business, the focus of attention (and investment dollars) is on oil and natural gas. However, Enterprise sees a big opportunity in the underserved Natural Gas Liquefied Natural Gas (NGL) space. Booming shale production has pushed prices for related hydrocarbons such as ethane, propane, butane, isobutane and pentane. To capture the wide spread between raw materials and finished marketable products, the company has invested billions in new processing facilities throughout Texas and the rest of the Midwest. It is a profitable business (the partnership now generates nearly 60% of the gross operating margin of these NGL operations), which should benefit from America's growing energy production.

Oil and Gas Exports: In 2015, Enterprise issued $ 6.0 billion to break into the oil tank business, in addition to buying a number of storage and energy terminals along the Gulf Coast. That turned out to be a wise decision. The year after its purchase, the US government legalized the export of American oil production. As export volumes increase, more barrels of crude oil will flow through this region. The company will raise growing, lucrative fees for storage, processing and distribution of these exports.

  Chart

YCharts EPD dividend data

Some people describe pipelines as "interstate highways" of the oil field. Well, if that's true, you can imagine these affiliates like restaurants, toilets, truck stops and service stations that drivers need as well. These present profitable businesses that are far safer than the actual drilling for oil and gas. And as traffic on these energy highways will increase sharply over the next few years, Enterprise's profits should grow in lockstep.

In the short term, however, one can expect the growth rate of corporate distribution to slow. The company has so many projects on the plan, management wants to save money to finance their expansion. Sure, that could do some damage in the short term (although Enterprise's almost 7% rise in yield is nothing to be despised). But in the long term, these investments should pay off.

How high is the return?

With a return of 6.5% at today's prices and the prospect of dividend growth of 4% to 6% for many more years, I estimate the company's total return potential reaches the low double-digit range. That's a respectable return that cancels my hurdle rate. It is all the more impressive considering that the partnership is such a stable, profitable business.

Of course, you can not call these stone carved returns. Lower commodity prices could lead to slower production and reduce the need for new energy infrastructures. Higher interest rates could also increase borrowing costs and slow down the pace of new expansion projects. In both cases, shareholders would suffer as a result of lower increases in distribution.

However, Washington could pose the biggest threat to business. In March, the regulators of the Federal Energy Regulatory Commission decided to reject certain tax breaks favored by Master Limited Partnerships. The decision could trigger large losses for some pipeline owners and has triggered a massive sell-off in the MLP space.

The sell-off could turn out to be overreaction. The new regulatory changes will not affect the prices pipelines charge their customers as these transactions are negotiated in advance. And after the announcement, Enterprise executives issued a press release saying that the changes will not materially affect their balance sheet.

In retrospect, selling these tax changes could be a buying opportunity. With the general gloom and sinking in the oil spill and the added uncertainty of regulators, traders have sold some large pipeline equipment at bargain prices.

This could be a once in a lifetime opportunity to set up a wonderful business like Enterprise cheap.

Disclosure: I / we have not mentioned any positions in any stocks, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I do not receive any compensation for it (except from Alpha search). I have no business relationship with a company whose warehouse is mentioned in this article.


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