Enterprise Products Partners L.P.: Small Distribution Hike, Big Yield
This Energy Stock Raised Its Payout Again
What size do you want for your distribution hike?
That is, of course, a rhetorical question. It’s like an employee being asked how big of a bump they want to get in their paycheck. As dividend growth investors, we’d all want to receive payout increases that are as large as possible.
And there are actually companies that have recently delivered enormous dividend increases . But today, I would like to show you why even a small distribution hike could be good news to income investors.
I’m looking at Enterprise Products Partners L.P. (NYSE:EPD), a master limited partnership (MLP) headquartered in Houston, Texas.
On January 13, the partnership announced that its board of directors had declared a quarterly cash distribution of $0.445 per common unit. (Source: “Enterprise Declares Quarterly Distribution Increase,” Enterprise Products Partners L.P., January 13, 2020.)
The amount represented an increase of almost 0.6% from the MLP’s previous cash distribution of $0.4425 per common unit. The newly declared distribution is payable on February 12 to unitholders of record as of January 31.
Obviously, the magnitude of that distribution increase doesn’t seem like much. But here’s the thing: while most dividend growth companies would be proud if they could raise their payout once a year, EPD has been offering dividend increases every single quarter.
And those quarterly payout increases add up over time.
For instance, while the newly announced distribution was just 0.6% more than the prior payment, it was 2.3% higher than the partnership’s distribution a year ago. And over the past five years, EPD’s per-unit payout has grown by more than 20%. (Source: “Distribution Payments,” Enterprise Products Partners L.P., last accessed January 21, 2020.)
As a matter of fact, the latest announcement marked the MLP’s 62nd consecutive quarterly distribution hike. Going further back, you’ll see that Enterprise Products Partners has been paying increasing cash distributions for 21 years.
Enterprise Products Partners L.P. Maintains a Safe and Growing Payout
Trading at $28.36 per unit, Enterprise Products Partners offers investors a generous annual distribution yield of 6.3%.
The best part is, that payout is backed by a solid business. Just take a look at the partnership’s most recent earnings report and you’ll see what I mean.
In the third quarter of 2019, Enterprise Products Partners generated $1.6 billion in distributable cash flow, which provided 1.7 times coverage for its quarterly cash distribution of $0.4425 per unit. (Source: “Enterprise Reports Results for Third Quarter 2019,” Enterprise Products Partners L.P., October 28, 2019.)
In the first nine months of 2019, the partnership generated $5.0 billion of distributable cash flow, which also resulted in a distribution coverage ratio of 1.7 times for the period.
What this means is that the MLP generated around 70% more cash than it needed to fulfill its distribution obligations. In the world of high-yield energy stocks, that is considered a very wide margin of safety.
Energy stocks are often considered risky because of volatile commodity prices. But here’s the thing: while EPD is a heavyweight player in the energy sector—it commands a market capitalization of more than $60.0 billion—the partnership focuses on providing midstream services that are largely fee-based.
For instance, in the first nine months of 2019, fee-based operations contributed to 85% of the MLP’s gross operating margin. (Source: “Wells Fargo Midstream & Utility Symposium,” Enterprise Products Partners L.P., December 11, 2019.)
The partnership’s fee-based business model is one of the main reasons why it managed to generate durable cash flows throughout commodity price cycles. And that’s also why, even though oil and gas prices had a major crash in the summer of 2014, EPD stock’s payout has only been going up.
Of course, past performance is no guarantee of future results. But for those who want to collect a steadily increasing passive income stream from the energy sector, Enterprise Products Partners L.P. is definitely one of the top names to consider.