Lock in a 5.9% Yield (That’s Still Growing) by April 28
On the Hunt for Income? Read This
How does a 5.9% yield sound?
Well, given that the average S&P 500 company pays just 1.9% at the time of this writing, I’d say a 5.9% annual dividend yield sounds pretty good. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed April 9, 2019.)
To make the deal even sweeter, this 5.9% yield is still growing. But investors interested in earning this income stream might have to act quickly. The next round of payments will be mailed out in just a few weeks. To be eligible for that payment, investors need to take action before April 29.
Enterprise Products Partners L.P.
The stock behind this 5.9% yield is Enterprise Products Partners L.P. (NYSE:EPD), a master limited partnership (MLP) headquartered in Houston, Texas. Like many of its peers, EPD provides midstream energy services to producers and consumers of crude oil, natural gas, natural gas liquid (NGL), refined products, and petrochemicals.
One thing that makes EPD stock stand out is the sheer size of its business. We’ve profiled dozens of MLPs here at Income Investors, and Enterprise Products Partners is one of the biggest.
The partnership’s midstream energy asset portfolio currently consists of around 49,200 miles of pipelines, 14 billion cubic feet of natural gas storage capacity, and 265 million barrels of storage capacity for crude oil, NGLs, refined products, and petrochemicals. (Source: “Mizuho Energy Infrastructure Summit April 1–2, 2019,” Enterprise Products Partners L.P., last accessed April 9, 2019.)
As you might expect, such a massive set of operations has allowed EPD stock to command a substantial market capitalization. At the time of this writing, Enterprise Products Partners L.P. has a market cap of around $64.4 billion, which makes it not just one of the biggest MLPs, but also one of the biggest publicly traded midstream oil and gas companies in North America.
Of course, given what happened to the oil and gas industry during the past several years, you might be wondering whether a big energy stock like EPD can really be worth considering for today’s risk-averse income investors.
In my opinion, the answer is “yes.”
A Solid Energy Stock
You see, commodity prices crashed big-time in the summer of 2014, bringing down many energy stocks in the process. And even if you were an income investor who didn’t care about stock prices, the downturn in the energy sector meant that many oil and gas companies had no choice but to slash their payouts.
Not Enterprise Products Partners L.P., though.
While many of its peers were cutting their dividends, Enterprise Products Partners was raising its payout to investors. As a matter of fact, the partnership has increased its cash distribution every quarter since the summer of 2004. That’s 59 consecutive quarterly distribution hikes! (Source: “Distribution Payments,” Enterprise Products Partners L.P., last accessed April 9, 2019.)
Just think about that for a second. During a period of serious financial crisis and a huge crash in oil and gas prices, every three months, EPD stock investors received a bigger distribution check in the mail.
And if you are worried about whether those continuous payout increases are sustainable, a look at the partnership’s latest earnings report should be reassuring.
In the fourth quarter of 2018, Enterprise Products Partners L.P. generated $1.5 billion in distributable cash flow, providing 1.5-times coverage for the $0.435 per share of cash distribution paid for the period.
In other words, the cash generated from EPD’s operations for distribution purposes was 50% more than what was needed to cover the actual payout. (Source: “Enterprise Reports Record 2018 Results,” Enterprise Products Partners L.P., January 31, 2019.)
Looking at the full-year results, things were equally solid. In 2018, EPD generated a whopping $6.0 billion in distributable cash flow. That amount of money allowed the partnership to achieve a distribution coverage ratio of around 1.6 times for the year, a very commendable figure in the world of high-yield MLPs.
Returning Cash to Investors
Worth noting is that, on the same day of its latest earnings release, Enterprise Products Partners L.P. announced a stock buyback program. Under the program, the partnership will be able to repurchase up to $2.0 billion of its common units. (Source: “Enterprise Announces $2 Billion Unit Buyback Program; Provides 2019 Distribution Guidance,” Enterprise Products Partners L.P., January 31, 2019.)
A stock buyback program is another way for an MLP to return cash to investors. Repurchasing EPD’s own common units would reduce the total number of units outstanding, thereby giving each existing unitholder a slightly larger ownership of the business.
And don’t worry, the partnership will still pay a generous distribution. In fact, it said explicitly that “with regard to distribution guidance for 2019, based on current expectations, Enterprise’s management plans to continue to recommend to its board a $0.0025 per unit per quarter increase to its distribution rate.” (Source: Ibid.)
Therefore, instead of earning four distributions of equal amounts, investors who purchase EPD stock today will likely get a bigger distribution check every quarter in 2019, with a yield-on-cost exceeding the currently suggested 5.9%.
EPD Stock: Lock in a Growing Yield by April 28
Earlier this week, the board of directors of EPD’s general partner declared a quarterly cash distribution of almost $0.44 per unit, representing a 2.3% increase year-over-year and a 0.6% increase sequentially. (Source: “Enterprise Declares Quarterly Distribution Increase,” Enterprise Products Partners L.P., April 8, 2019.)
The distribution is payable on May 13, 2019 to unitholders of record as of April 30. The ex-dividend date is set to be April 29, meaning if an investor purchases EPD stock on or after April 29, they won’t receive the distribution. To collect this distribution check, investors would need to own EPD units before April 29.