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This Master Limited Partnership Hiked Its Dividend for 57 Quarters

conceptual business illustration with the words master limited partnership

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Thursday, 25 October 2018 01:13 PM Current | Bio | Archive

Master Limited Partnerships, or MLPs for short, should be approached with caution. The MLP asset class offers high yields, which makes them attractive to income investors. But as investors experienced during the oil and gas downturn of 2014-2016, MLPs carry significant risks.

Investors should make sure the MLP they are considering has not just a high yield, but also a manageable level of debt, and strong distribution coverage. To those ends, Enterprise Products Partners (EPD) is among the highest-quality MLPs.

Enterprise Products sports a 6.4% yield, and better yet, the company has raised its distribution for 57 quarters in a row. It is a very strong high-yield security with growth potential, and expected returns of over 10% per year.

A Best-In-Class MLP

Enterprise Products Partners is one of the largest MLPs in the United States. It generates annual revenue of nearly $30 billion. As is the case with many MLPs, it operates in the midstream segment of the energy industry. Its primary business activities are storage and transportation of oil, natural gas, natural gas liquids (NGLs), and other refined products.

The company has a very impressive network of transportation assets, which includes ~50,000 miles of pipeline, with 260 million barrels of NGL, refined products and crude oil storage capacity. In addition, it has a huge natural gas business, with 14 billion cubic feet of natural gas storage capacity and 26 natural gas processing plants. Enterprise Products is also engaged in fractionation, with 22 NGL and propylene fractionators. Lastly, Enterprise Products has a major NGL important and export terminal in Houston.

These high-quality assets have led to consistent growth for many years. In early August, Enterprise Products reported a strong 2018 second quarter. Revenue of $8.47 billion increased 28% from the same quarter last year. Distributable cash flow—a key measure for MLPs—increased 36% last quarter, to $1.43 billion. The NGL Pipelines & Services segment reported 20% operating profit growth for the quarter, due mostly to higher volumes and fees. The Petrochemical & Refined Products Services segment reported 50% operating profit growth for the quarter.

New Projects Fueling Enterprise Products’ Growth

Pipeline operators like Enterprise Products rely on new projects for growth. Fortunately, the company has a high-quality project lineup which should continue to fuel its growth in the years ahead. The company has nearly $5 billion of growth projects currently under construction, including the Shin Oak NGL Pipeline in the Permian Basin, one of the best oil fields in the United States. The Shin Oak NGL Pipeline is expected to have total capacity of 600,000 barrels per day once completed.

Exporting is another major growth catalyst for Enterprise Products. Energy demand is growing at a high rate in the international markets, particularly among emerging economies. According to Enterprise Products, demand for liquefied petroleum gas increased 17% per year in China from 2012 to 2017. LPG demand grew at an 8% annual rate in India over the same period.

Growth from new projects in North America, as well as exporting to other countries, should allow Enterprise Products to continue rewarding investors with distribution increases.

High Yield And Distribution Growth

Enterprise Products stock currently yields 6.3%, and the company has increased its distribution for 57 quarters in a row. On October 4th, Enterprise Products raised its distribution by 2.4% from the same payout last year. Importantly, the company has a strong balance sheet and sufficient distribution coverage. Enterprise Products Partners is one of the safest MLPs, with a credit rating of BBB+ from Standard & Poor’s. A credit rating this high is rare among the MLP asset class. In addition, Enterprise Products had a distribution coverage ratio of 1.5x through the first half of 2018, which means the company generated 50% more cash flow than it needed to pay the distribution.

Enterprise Products is expected to grow earnings before interest, taxes, depreciation, and amortization (EBITDA) by 4% per year over the next five years. In addition to the 6.3% yield, investors could earn 10%+ annual returns from Enterprise Products stock over the next five years. Plus, future returns could be boosted from a rising stock valuation. For example, Enterprise Products currently trades for a price-to-EBITDA ratio of 10.3, compared with a fair value estimate of 11.2. Expansion of the price-to-EBITDA ratio could add 1.7% to annual returns. As a result, total expected returns could reach 12% each year over the next five years. Enterprise Products does not offer the highest yield among MLPs, but it is one of the safest, with a high expected return and distribution increases each year.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
 

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BenReynolds
Master Limited Partnerships, or MLPs for short, should be approached with caution. The MLP asset class offers high yields, which makes them attractive to income investors. But as investors experienced during the oil and gas downturn of 2014-2016, MLPs carry significant risks.
master, limited, partnership, dividend, mlp
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2018-13-25
Thursday, 25 October 2018 01:13 PM
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