Enterprise Products Partners L.P.: This Energy Stock Now Yields 9.2%
A High-Yield Stock to Think About
Over the past two months, oil prices have been making a steady recovery. Does that mean it’s okay to chase high-yield stocks in the energy sector?
Well, let’s not forget that, although energy investors might have recouped some of their losses recently, companies in this industry could still be risky investments. As long-term income investors, what we want to find are stocks that not only provide generous yields, but also have the ability to cover their payouts through thick and thin.
With that in mind, let’s check out Enterprise Products Partners L.P. (NYSE:EPD).
Headquartered in Houston, Texas, Enterprise Products Partners is one of the largest publicly traded master limited partnerships (MLPs). The partnership completed its initial public offering back in 1998. Since then, it has grown its asset base from $715.0 million to $57.0 billion. (Source: “Business Profile,” Enterprise Products Partners L.P., last accessed June 22, 2020.)
EPD’s assets include approximately 50,000 miles of pipelines for natural gas, natural gas liquid (NGL), crude oil, refined products and petrochemicals; 260 million barrels of storage capacity for NGL, crude oil, refined products, and petrochemicals; and 14 billion cubic feet of storage capacity for natural gas. (Source: “Investor Deck June 2020,” Enterprise Products Partners L.P., last accessed June 22, 2020.)
For MLP investors, distribution is a key focus, and on that front, Enterprise Products Partners stock is very generous. The partnership currently pays a cash distribution of $0.445 per unit on a quarterly basis. At the time of this writing, that quarterly rate translates to an annual yield of 9.2%.
EPD reported 2020 first-quarter results on April 29. For the reporting quarter, the partnership generated net income of $1.4 billion, or $0.61 per unit. This compares to a net income of $1.3 billion, or $0.57 per unit, it earned in the year-ago period. (Source: “Enterprise Reports Earnings for First Quarter 2020; Reduces 2020 Capital Expenditures by $1.1 Billion,” Enterprise Products Partners L.P., April 29, 2020.)
In the first quarter of 2020, the MLP generated $1.6 billion in distributable cash flow, which was 1.6 times the amount needed to cover its cash distributions declared for the period. In challenging times like this, a 1.6-times distribution coverage ratio should be reassuring to income investors.
Given the economic uncertainties, management decided to reduce EPD’s 2020 capital investment budget by $1.0 billion.
One thing I would like to point out about EPD stock is that, despite the company coming from the volatile energy sector, this MLP has a pretty solid track record when it comes to returning cash to investors. As a matter of fact, Enterprise Products stock has delivered higher distributions to unitholders every year since it went public in 1998. (Source: “Distribution Payments,” Enterprise Products Partners L.P., last accessed June 22, 2020.)
For now, management is holding the cash distribution at the current level. In the company’s latest earnings conference call, EPD’s Co-Chief Executive Officer and Chief Financial Officer Randy Fowler said that one of the MLP’s financial objectives is “to defend and maintain” the distribution. (Source: “Enterprise Products Partners L.P. (EPD) on Q1 2020 Results – Earnings Call Transcript,” Seeking Alpha, April 29, 2020.)
Bottom Line on Enterprise Products Partners L.P.
At the end of the day, keep in mind that Enterprise Products Partners runs a largely fee-based business, with fee-based operations accounting for 86% of its gross operating margin last year. EPD also has a credit rating of BBB+/Baa1, the highest in the midstream energy space.
The partnership’s management is yet to announce when they will resume distribution growth. But with a reliable yield of 9.2%, EPD stock deserves the attention of income investors.