HomeBusiness4 Reasons to Buy Enterprise Products Partners Stock Like There's No Tomorrow

4 Reasons to Buy Enterprise Products Partners Stock Like There’s No Tomorrow

One of the stocks I have personally owned for the longest time is Partners for business products (NYSE:EPD)after I first bought it in 2008. Despite owning the stock for more than 15 years, I think it’s still one of the most attractive high-yield energy stocks to buy today.

Let’s look at four reasons why, if I didn’t already own it, I’d buy the stock today like there’s no tomorrow.

1. Enterprise Products performs consistently

If you’ve ever heard the description “sleep well,” Enterprise is the embodiment of that term. The company has been one of the most consistent operating performers in equities in any sector over the past two decades. This stems from the largely fee-based contract structure, which has historically accounted for approximately 85% of gross operating profit, with approximately half of fee-based revenue coming from take-or-pay contracts, where the company is paid, regardless of whether the customers use the service or not.

Meanwhile, given its large integrated midstream system, the company has many natural hedging and arbitrage opportunities built into the business. This means that when one part of the business is struggling, it often leads to opportunities in other areas. These dynamics help the company deliver stable, largely growing results year after year, even during difficult periods such as the Great Recession, the 2014-2015 oil price collapse and the COVID-19 pandemic.

See also  Three reasons why the US financial markets are going through a long Fed hold

Enterprise’s consistency is also reflected in its distribution to shareholders, which has been able to grow every year for the past 25 years.

2. Enterprise Products offers growing distribution with high returns

One of the first things that draws investors to Enterprise Products is its high yield, which currently stands at 7.3%. High returns in themselves are not a reason to own shares, but Enterprise’s distribution is well covered by cash flow, and its balance sheet is in good shape. These are two of the important considerations when assessing the safety of a company’s dividend payout.

Last quarter, Enterprise had robust distribution coverage of 1.7x based on distributable cash flow (DCF), operating cash flow minus maintenance capital expenditure (capex). Meanwhile, the company ended the first quarter with a debt burden of three times, which it defines as net debt adjusted for equity credits in junior subordinated notes (hybrids), divided by adjusted interest, taxes, depreciation and amortization (EBITDA). This is a decrease from the more than four times greater leverage in 2017.

All told, Enterprise Products is well positioned to continue its impressive distribution growth in the coming years.

Pipeline leading to the processing facility.

Image source: Getty Images.

3. Enterprise Products has growth opportunities

After reducing growth investments during the early stages of the pandemic, Enterprise is starting to ramp them up again. That’s good news for investors, as the company has consistently delivered returns of around 13% on its growth projects over the past six years. This means that for every $1 billion in growth investments the company spends, it generates approximately $130 million in gross operating profit annually.

See also  Investors Should 'Run' If Biden Enacts This Tax Hike: Trump Economic Adviser

The company currently has more than $6.9 billion in approved major growth projects under construction and expects to spend between $3.25 billion and $3.75 billion on growth projects this year and next. That’s up from the $1.6 billion to $1.8 billion it spent on organic growth projects in 2021 and 2022.

Meanwhile, the company received a long-awaited deepwater port permit for its Sea Port Oil Terminal (SPOT) project earlier this year. If the project is built, Enterprise would become a major player in the crude oil export market.

With its natural gas transportation network, especially in the Permian, Enterprise is also well positioned to win its fair share of projects to support the growing use of natural gas energy to support data center power needs and artificial intelligence (AI). AI consumes a tremendous amount of energy, and natural gas will likely be the primary energy source to give these data centers the cheap, reliable energy they need in the coming years.

4. Enterprise Products has an attractive valuation

Despite the strong balance sheet and the growth opportunities ahead, Enterprise Products has a very attractive valuation based on an enterprise value at forward earnings before interest, tax, depreciation and amortization (EV/EBITDA) basis of 9.2 times. Given the debt and capital expenditures in the midstream sector, this is typically one of the most commonly used metrics to value these stocks.

See also  Is it too late to buy Super Micro Computer stock?
EPD EV to EBITDA (forward) chartEPD EV to EBITDA (forward) chart

EPD EV to EBITDA (forward) chart

From a historical perspective, the midstream sector traded at an average EV/EBITDA multiple of over 13.5x between 2011 and 2016 before the oil crash, while Enterprise often traded at a premium multiple of over 15x. This is despite the fact that the company and the sector as a whole are in better financial shape today than they were ten years ago.

Trading at a low historical valuation, combined with a strong balance sheet, high yield and strong future growth prospects, Enterprise Products Partners is a pipeline stock I would buy like there’s no tomorrow.

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 The analyst team 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 survived the cut could deliver monster returns in the coming years.

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 $775,568!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.

View the 10 stocks ยป

*Stock Advisor returns June 10, 2024

Geoffrey Seiler holds positions at Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

4 Reasons to Buy Enterprise Products Partners Stock Like There’s No Tomorrow was originally published by The Motley Fool

- Advertisement -
RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Most Popular

Recent Comments