Enterprise Product Partners (NYSE:EPD) This is the kind of equity stock that even the most conservative investors will love. The list of positives includes a conservative business model in a highly volatile sector, high performance and a solid financial base.
If this sounds good to you, here is a more detailed analysis of each point related to this important midstream energy company.
1. Enterprise Products Partners is boring
Oil and natural gas prices can be quite exciting at times, as both are often subject to massive and rapid swings. Given the impact of commodity prices on the financial performance of energy producers, the energy sector as a whole is generally considered volatile.
But there is a niche that operates in a very different way: the intermediate sector. That’s where Enterprise Products Partners operates.
Midstream players like Enterprise own pipelines, as well as storage and transportation infrastructure. These are vital assets that connect the upstream (drilling) sector to the downstream (refining and chemicals) and to the rest of the world.
Midstream companies typically charge fees for the use of their assets, making them tolling companies. That means energy demand is more important than energy prices to Enterprise’s financial performance. And energy demand tends to be strong even when energy prices are low.
The venture is not a thrill ride, it just helps transport oil and natural gas, and that will be a big plus for investors who like consistency.
2. The company has great and reliable performance.
As a master limited partnership (MLP), Enterprise is specifically designed to pass income on to shareholders. So a high yield shouldn’t be surprising, per se. But its 7.2% yield will still be very attractive to income-focused investors.
Compare that figure with the performance of the S&P 500 index, which is a meager 1.3%. Or the energy sector in general, which is yielding around 3.1% using Select Energy Sector SPDR Fund As an industry representative, it’s hard to beat Enterprise Products Partners if you’re looking for passive income in the energy sector.
And here’s another very attractive fact: the company has increased its distribution every year for 25 consecutive years. Annualized distribution growth has averaged 7%, which is pretty impressive.
To be clear, the most recent increases have not reached that figure, so investors should expect mid-single-digit increases. But the real story is high yield, not high distribution growth. Yield, in the end, will make up the bulk of an investor’s return.
3. The company has a solid financial foundation
Of course, performance is only as good as good distribution. And fortunately, Enterprise scores very well for financial strength. The long streak of annual increases in distribution speaks to that strength, but there are more direct ways to assess the financial foundation here.
For starters, the balance sheet is rated investment grade. It kept its leverage at the lower end of its peers. Its debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio, a key leverage metric in the midstream space, has been the best in the industry for some time.
And more specifically, the company’s distributable cash flow covers its distribution 1.7 times. There’s plenty of room for adversity here before that distribution runs the risk of being cut.
A great option for income investors.
There are always trade-offs when it comes to investing. With Enterprise, the biggest problem will be low growth.
But if your goal is to generate a reliable passive income stream, then you’ll probably look at Enterprise and want to buy it like there’s no tomorrow. Of course, you shouldn’t own Enterprise alone, but rather it should be viewed as part of a broader, more diversified portfolio. But really, it’s as good as it gets when it comes to finding reliable income stocks.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
Three Reasons to Buy Enterprise Product Partners Like There’s No Tomorrow was originally published by The Motley Fool