Some investments are great for a specific type of investor, but for many others they won’t be as suitable. That is exactly the situation that exists Partners for business products (NYSE:EPD) Today.
If you’re looking at this midstream master limited partnership (MLP), here are some reasons why you might want to buy, sell, or hold it for the long term.
Reasons to Sell Enterprise Products Partners
The list of reasons to sell or never buy Enterprise Products Partners is actually quite easy to identify. And it will be quite clear which types of investors will want to ignore this high-yield option. With a hefty distribution yield of 7.1%, investors focused on growth probably won’t find Enterprise interesting at all. In fact, distribution here will likely account for the lion’s share of revenue. Distribution increases have only seen low to mid-single digit growth over the past decade, which speaks to the MLP’s growth prospects.
There’s another problem here, as Enterprise Products Partners is an MLP, a pass-through corporate structure designed specifically to create tax benefits for shareholders. But MLPs have unique tax considerations, including the fact that they don’t play nice with tax-advantaged retirement accounts and that they require investors to file a K-1 form at tax time. Investors who prefer simple investments will likely be better off elsewhere, despite the attractive returns offered by Enterprise.
Finally, Enterprise isn’t for you if you believe renewable energy is the future and simply don’t want to touch anything related to carbon fuels. The entire company is focused on owning the energy infrastructure that helps move oil and natural gas around the world.
Reasons to Buy Enterprise Products Partners
While growth investors won’t like Enterprise, income investors probably will. The first indication of this is the strong distribution yield of 7.1%. The second is that MLPs often generate income that is tax-efficient because part of the payment can be classified as a return of capital (this lowers your cost basis). And distribution has increased annually for 26 consecutive years, which is a very strong track record for an income investment.
But the good news doesn’t stop there. The revenue stream that Enterprise Products Partners creates is supported by an investment-grade rated balance sheet. The MLP’s distributable cash flow covers its payout by as much as 1.7 times, suggesting there is a lot of headroom for setbacks before a cut would be appropriate. Furthermore, Enterprise has always tried to operate with very low leverage compared to its closest competitors, so it is one of the strongest options financially in the midstream sector.
If you like reliable, secure income, Enterprise Products Partners is probably a good option for your portfolio.
Reasons to Hire Enterprise Products Partners
As in most situations, the hold and buy logic will be roughly the same. But there is one important thing that needs to be highlighted: Enterprise Products Partners’ business model. It is a midstream provider, meaning it owns energy infrastructure such as pipelines, storage, transportation and processing assets. These are expensive items to build and purchase, but they generally provide consistent cash flows. The key is that Enterprise charges customers for the use of its assets, acting as a toll taker.
That’s not exciting, but the energy sector cannot function without the infrastructure that Enterprise possesses. As long as oil and natural gas remain important to the world, Enterprise will have happy and willing customers. Note that despite the energy transition taking place, oil and natural gas are expected to remain important for decades to come. And since Enterprise charges fees to use its assets, oil and natural gas prices aren’t as important to its performance. If you like boring investments, Enterprise is the kind of holding you buy and hold for the long term.
Enterprise is a great option for income
Growth investors will hate Enterprise Products Partners. Value investors, who have not yet been tapped, will likely be somewhat interested, as they will note that the distribution yield is slightly above the 10-year average (but the MLP is clearly not currently listed). Dividend investors will be the group most attracted to these high-yield stocks for the long list of reasons mentioned above. But mainly because Enterprise is reliable and financially strong.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool holds and recommends positions in Enbridge and Kinder Morgan. The Motley Fool recommends Enterprise Products Partners and Tc Energy. The Motley Fool has a disclosure policy.
Enterprise Products Partners Shares: Buy, Sell or Hold? was originally published by The Motley Fool
