Like most stocks, Enterprise Products Partners (NYSE:EPD) has tumbled over the past few weeks because of the COVID-19 coronavirus outbreak. Overall, units of the master limited partnership (MLP) have fallen more than 20% below their recent high. The main factor weighing on the energy company is the unknown of how much impact the outbreak will have on the global economy.
While the coronavirus outbreak might have some near-term effect on the energy market, the long-term outlook for Enterprise Products Partners looks bright. That's one of the many reasons why the recent sell-off looks like an excellent buying opportunity for dividend investors.
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It has one of the best financial profiles in the energy sector
With its unit price tumbling in recent weeks, Enterprise Products Partners now yields 7.4%. While that might not be the highest in the energy sector, it's one of the safer payouts. Three factors drive that view.
First, Enterprise Products Partners produces very stable cash flow since long-term contracts and other predictable sources lock in more than 85% of its annual earnings. Second, the company distributes only around 60% of its cash flow to investors through its high-yielding payout, enabling it to retain a lot of money to help finance expansion projects. Finally, it has one of the highest credit ratings in the midstream sector, backed by a low leverage ratio of 3.3 times debt-to-EBITDA, well below the 4.0 target of most MLPs.
That strong financial profile gives Enterprise Products Partners the flexibility to continue growing its distribution to investors even as it keeps expanding its midstream footprint.
It has one of the best growth profiles in the midstream sector
Enterprise Products Partners generated record earnings and cash flow last year. Overall, it produced $6.6 billion in cash that it could have distributed to investors, up 11% year over year. It retained $2.7 billion of that money to finance expansion projects, covering a significant portion of the $4.7 billion it invested on growth projects last year. It was easily able to fund the remaining amount with its top-tier balance sheet.
Enterprise Products Partners expects to invest another $3 billion to $4 billion on expansion projects this year and spend an additional $2 billion to $3 billion in 2021. Those investments should give it the fuel to continue growing its cash flow. Overall, it has $7.7 billion of growth projects under construction that should start up by 2023, with several more in development. That's one of the largest backlogs in the midstream sector.
With such a visible growth pipeline, Enterprise should have the fuel to keep increasing its distribution. The MLP has given its investors a raise for 21 straight years, including in each of the last 62 consecutive quarters.
A plan to take advantage of its increasingly attractive valuation
Typically, companies with strong financial profiles and growth prospects trade at premium valuations. However, with Enterprise's unit price declining this year, it now trades at less than eight times cash flow. That's well below its historical mid-teens multiple as well as the valuation of some of its peers.
Because its units are trading at such a low value, Enterprise plans to allocate more of its cash flow toward its repurchase program this year, with it currently intending to use 2% on the buyback. If its value keeps falling, the MLP could potentially use its strong balance sheet to opportunistically repurchase more units, especially if capital spending trends toward the lower end of its budget range.
A steadily growing high yield at a dirt cheap price
Enterprise Products Partners' sell-off last month has allowed income investors to lock in a higher yield on this top-notch MLP. That potentially sets them up to earn attractive total returns in the coming years as Enterprise's expansion program gives it the fuel to keep growing cash flow as well as its distribution.
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2020-03-07 17:24:00Z
CBMiYGh0dHBzOi8vd3d3LmZvb2wuY29tL2ludmVzdGluZy8yMDIwLzAzLzA3LzEtdG9wLW5vdGNoLWhpZ2gteWllbGQtZGl2aWRlbmQtc3RvY2stdG8tYnV5LXRoaXMuYXNweNIBZGh0dHBzOi8vd3d3LmZvb2wuY29tL2FtcC9pbnZlc3RpbmcvMjAyMC8wMy8wNy8xLXRvcC1ub3RjaC1oaWdoLXlpZWxkLWRpdmlkZW5kLXN0b2NrLXRvLWJ1eS10aGlzLmFzcHg
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