Corporate product partners (NYSE:EPD) is the kind of income stock that even the most conservative investors fall in love with. The list of positives includes a conservative business model in a highly volatile sector, great returns and a strong financial foundation.
If that sounds like you, here’s a closer look at each point as it relates to this all-important midstream energy company.
1. Enterprise Products Partners is boring
Oil and natural gas prices can be quite exciting at times, as both are often subject to huge and rapid swings. Given the impact of commodity prices on the financial performance of energy producers, the energy sector as a whole is generally considered volatile.
But there is one niche that operates in a very different way: the midstream sector. This is where Enterprise Products Partners operates.
Midstream players like Enterprise own pipelines, along with storage and transportation infrastructure. These are crucial assets that connect the upstream sector (drilling) with the downstream sector (refining and chemicals) and with the rest of the world.
Midstream companies typically charge for the use of their assets, making them toll-paying businesses. That means that energy demand is more important than energy prices to Enterprise’s financial performance. And energy demand is typically robust, even when energy prices are low.
Entrepreneurship isn’t exciting; it just helps move oil and natural gas – and that will be a big plus for investors who like consistency.
2. Enterprise has a large, reliable yield
As a master limited partnership (MLP), Enterprise is specifically designed to pass revenue to unitholders. So a high return should not necessarily be shocking. But the 7.2% yield will still be very attractive to income-oriented investors.
Compare that figure with the yield of the S&P500 index, which amounts to a paltry 1.3%. Or to the broader energy sector, which yields approximately 3.1% using Energy Select Sector SPDR Fund as a proxy for the industry. It’s hard to beat Enterprise Products Partners if you’re looking for passive income in the energy sector.
And there is another very attractive fact: the company has increased its distribution every year for 25 consecutive years. Annual distribution growth averages 7%, which is quite impressive.
To be clear, more recent increases have not lived up to that figure, so investors should only expect rates to rise into the mid-single digits. But the real story is high returns, not high distribution growth. Ultimately, returns will account for the lion’s share of an investor’s return.
3. Company has a rock-solid financial foundation
Of course, returns are only as good as distribution is strong. And fortunately, Enterprise scores very well on financial strength. The long streak of annual distribution increases speaks to that strength, but there are more direct ways to assess the financial basis here.
To start with, the balance sheet is rated as investment grade. It maintained its leverage at the low end of its competitors. The debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio, a key leverage metric in the midstream space, has been one of the best in the industry for some time.
And, more importantly, the company’s distributable cash flow covers the distribution 1.7 times. There’s a lot of room for headwind here before that distribution is at risk of being cut.
A great option for investors looking for income
There are always trade-offs when it comes to investing. With Enterprise, the biggest trade-off is going to be low growth.
But if your goal is to generate a reliable passive income stream, then you’ll probably look at Enterprise and want to buy it like there’s no tomorrow. Of course, you shouldn’t own Enterprise alone, and it should be viewed as part of a larger, diversified portfolio. But it really is as good as it seems when you’re trying to find reliable income stocks.
Should You Invest $1,000 in Enterprise Products Partners Now?
Before purchasing shares in Enterprise Products Partners, consider the following:
The Motley Fool stock advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Enterprise Products Partners wasn’t one of them. The ten stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $757,001!*
Stock advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock advisor is on duty more than quadrupled the performance of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns from June 24, 2024
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
3 Reasons to Buy Enterprise Products Partners Like There’s No Tomorrow was originally published by The Motley Fool
