EPD Stock: 7.7%-Yielding Midstream Company Has Raised Dividends for 22 Years
June 4, 2021
Enterprise Products Partners L.P. Gains Traction as U.S. Economy Reopens
For years now, interest rates have been near record lows, which means the Federal Reserve has effectively eliminated “income” from income investing. As a result, income-starved investors have been turning to the stock market.
It can be risky investing for the sake of yield, though. That’s because there’s a risk/reward trade-off. The higher the yield, the riskier the equity. And there’s no point investing in a stock with a 15% yield when the underlying stock price is plunging (which, in turn, boosts the yield, attracting more desperate investors).
It might sound like a no-brainer, but the best thing that yield hogs can do is find financially robust companies that provide both share-price appreciation and growing high-yield dividends.
One of the best of these companies is Enterprise Products Partners L.P. (NYSE:EPD). For starters, its quarterly dividend stands at $0.45 per unit, or $1.80 annually. At EPD stock’s current share price, that translates to an annual dividend yield of 7.7%.
The distribution is safe, too. In the first quarter of 2021, the company reported net income of $1.3 billion ($0.61 per share), compared to $1.4 billion ($0.61 per share) in the same prior-year period. (Source: “Enterprise Reports First Quarter 2021 Earnings,” Enterprise Products Partners L.P., May 3, 2021.)
The company’s net cash flow from operations (CFFO) was $2.0 billion for the first quarters of both 2020 and 2021. During the first quarter of 2021, Enterprise Products raised its distribution by 1.1% to $0.45, from $0.445 in the first quarter of 2020.
Enterprise Products Partners L.P.’s payout ratio to common unitholders of distributions and partnership unit buybacks for the 12 months ended March 31, 2021 was just 68% of its CFFO. That’s much better than the payout ratio of other U.S. midstream C corporations, which average 54%.
On top of that, Enterprise Products’ distributable cash flow (DCF) was $1.7 billion for the first quarter of 2021, compared to $1.6 billion for the first quarter of 2020. Excluding non-operating amounts totaling $81.0 million, the company’s DCF provided 1.7 times coverage for its first-quarter distributions.
Not only is Enterprise Products stock’s dividend safe, it’s growing. The company has raised its annual cash distribution rate for 22 consecutive years, expanding at a compound annual growth rate (CAGR) of seven percent.
Over that time frame, EPD stock has returned $39.8 billion of capital to equity investors via distributions and unit buybacks.
And the company likes to maintain a high dividend yield, even as its share price rises. Enterprise Products stock’s trailing annual dividend yield is 7.6% and its five-year average dividend yield is 7.0%.
As for the price of EPD stock, it has been ripping higher since the coronavirus-fueled stock market crash in March 2020. As of this writing, the stock is up:
- Three percent over the last three months
- Eight percent over the last six months
- 25% year-to-date
- 33% year-over-year
Chart courtesy of StockCharts.com
With the post-pandemic U.S. economy set to come roaring back, there’s every reason to believe that Enterprise Products stock’s big gains and high dividend payouts will continue.
Why the optimism?
Houston, TX-based Enterprise Products Partners is the pre-eminent midstream energy infrastructure company, with best-in-class assets throughout the value chain.
Thanks to its diverse holdings, the company can aggregate the supply of every type of hydrocarbon from multiple sources in major producing basins, like the Permian, Eagle Ford, Piceance, and Green River. It can also deliver energy to every major end market (i.e., exports, refineries, and petrochemicals). (Source: “Investor Deck: May 2021,” Enterprise Products Partners L.P., last accessed June 2, 2021.)
The company has grown significantly since its initial public offering (IPO) in July 1998, increasing its asset base from $715.0 million to $57.0 billion in 2019. This tremendous increase is a result of both organic growth and acquisitions.
This has allowed Enterprise Products Partners to become a dominant player in every field it operates.
- Natural Gas Liquids: The company is the world’s largest exporter of liquefied petroleum gas (LPG)
- Crude Oil: It handles low-sulfur U.S. crude oil, supporting the transition to cleaner-burning fuels
- Natural Gas: Once the Gillis, LA pipeline is finished this year, the company will have the capacity to deliver more than one billion cubic feet of liquid natural gas liquid (LNG) per day, to feed export demand
- Petrochemicals: It handles more than 400,000 barrels per day of ethylene and propylene. Demand for these products grows in excess of gross domestic product (GDP) as people’s living standards improve and their demand for higher-quality fuels rises
Overview of Combined Operations
Pipelines
- 50,000 miles of natural gas, natural gas liquid (NGL), crude oil, refined product, and petrochemical pipelines
Storage
- 260 million barrels of NGL, refined product, and crude oil storage capacity
- 14 billion cubic feet of natural gas storage capacity
Natural Gas Processing
- 22 natural gas processing plants
Fractionation
- 23 NGL and propylene fractionators
Import/Export Terminals
- Houston Ship Channel has seven deep-water ship docks
- Beaumont has five deep-water ship docks
- Seaway Texas City and Freeport have four deep-water ship docks
- Morgan’s Point has two deep-water ship docks
2021–2022 Growth Drivers
Enterprise Products Partners reported solid first-quarter results, including 10 operating and financial records, despite the impact of the pandemic on energy demand and commodity prices. The company’s revenue climbed by 22% to $9.1 billion. And, as noted earlier, its net income slipped by less than one percent to $1.3 billion, or $0.61 per share. (Source: Enterprise Products Partners L.P., May 3, 2021, op. cit.)
With the global economy expected to continue reopening this year, this dividend stock is poised for stronger growth.
Demand for petrochemical products, such as ethylene and propylene, remains high as the economy recovers and restocking begins. Ethylene and propylene typically grow in excess of GDP at a rate of 3.3% per year, compared to GDP at three percent.
U.S. ethylene cracking plants, which transform ethane into ethylene (which is used in plastics), have been at reduced capacity primarily due to winter storms and the lingering effects of hurricanes, but utilization has been returning steadily as margins remain very strong.
Refinery utilization bottomed at 65% in February and has since recovered to 86%. Save for jet fuel, demand has recovered nicely across the board.
LPG exports continue to be supported by global residential and petrochemical demand. Poor global refinery utilization rates and production cuts by Organization of the Petroleum Exporting Countries-Plus (OPEC+) have left global markets undersupplied, causing overseas prices to rally and demand for U.S. exports to increase.
U.S. crude oil exports have been supported by production cuts by OPEC+ and global inventory drawdowns, but concerns about the coronavirus are still having an impact, especially in places like India and Latin America.
The Lowdown on Enterprise Products Partners L.P.
A leading provider of midstream energy services, Enterprise Products Partners L.P. has a diverse and integrated system that has helped it weather the coronavirus-fueled economic downturn better than most.
While there will still be periods of volatility, the company’s outlook is bright, with its propylene, NGL, refined products, and natural gas businesses benefiting from greater demand associated with the early stages of an economic recovery and higher commodity prices.
All of this should help boost the already bullish EPD stock and see it continue to reward investors with a growing high-yield dividend.
