Income investors looking for high yields should consider Master Limited Partnerships, or MLPs for short. These companies widely have high yields above 5%. But investors should not be solely focused on yield alone—it is even more important to invest in the highest-quality companies with secure payouts.
Investors want to avoid investing in companies that cut their distributions. Instead, income investors should stick to companies that have the ability to raise their payouts on a regular basis.
For example, Enterprise Products Partners (EPD) has a 6% yield, and more importantly has a very secure distribution. The payout is more than covered by the company’s strong cash flow, and future growth will allow Enterprise Products to continue raising its dividend each year.
As a result, Enterprise Products is one of the best high dividend stocks to buy today.
Business Overview & Recent Events
Enterprise Products Partners is the largest energy Master Limited Partnership (MLP), based on market capitalization of $63 billion. It is a midstream MLP, with services including storage and transportation of oil and gas. Enterprise Products Partners has $57 billion of assets at the end of 2018. Its assets include approximately 50,000 miles of pipelines, 260 million barrels of storage capacity for NGL (Natural Gas Liquids), crude oil, and other refined products; and 14 billion cubic feet of natural gas storage capacity. It also had 26 natural gas processing plants, and 23 fractionators.
The company’s strong assets have fueled excellent financial results in the past several quarters. In the 2018 fourth quarter, revenue of $9.2 billion increased 9% from the year-ago quarter, primarily due to strong volume growth. In 2018, liquid pipeline volumes increased 9%, natural gas pipeline volumes increased 12%, marine terminal volumes increased 12%, NGL fractionation volumes increased 14%, and propylene plant production volumes increased 23%. Distributable cash flow increased 29% for the fourth quarter and 33% for the full year.
Last year was a record-setter for Enterprise Products in many ways. The partnership established 23 operational and financial records in 2018. The company got off to an equally strong start in the 2019 first quarter. Distributable cash flow increased 18% in the first quarter to another company record of $1.6 billion, while EBITDA also surged by 17% to $1.63 billion. Meanwhile, gross operating margin overcame headwinds from the temporary closure of the Houston Ship Channel to gain 35% year-over-year. These strong results were largely driven by record volumes in its crude marine terminals and continued robust growth in crude volumes from the Permian Basin (expected to reach 700k bbl/day in 2019).
As an oil and gas transportation and storage company, Enterprise Products’ growth relies upon higher demand for its existing assets, as well as new projects. The company has a large project portfolio to fuel the future including the Mentone cryogenic natural gas processing plant in Texas, which will have the capacity to process 300 million cubic feet per day of natural gas and extract more than 40,000 barrels per day of natural gas liquids. The facility is expected to begin service in the first quarter of 2020. Another important project expected to begin service that year is the Shin Oak NGL Pipeline, which will have total capacity of 600,000 barrels per day.
Separately, Enterprise Products will benefit immensely from exports of natural resources to other countries, particularly in high-growth emerging markets in Asia. Demand for liquefied petroleum gas and liquefied natural gas is growing across the world, particularly in the emerging markets where populations are rising and economies are expanding rapidly. Enterprise Products’ total crude oil, NGL, petrochemical, and refined products exports currently exceed 1.5 million barrels per day, with additional capacity to ramp up in the near future.
High Yield And A Secure Payout
Perhaps the most attractive aspect of investing in Enterprise Products is the high dividend yield of 6%. And just as importantly, the payout appears secure. Enterprise Products is in strong financial condition with a manageable level of debt. Investors should pay close attention to balance sheets and leverage ratios in the MLP space, as the industry typically carries a high level of debt which is used to finance growth projects. When commodity prices are high, this is usually not a problem. But the sudden crash of oil and gas prices in 2014 and 2015 caused many overleveraged MLPs to cut their dividends. Some even went bankrupt as a result.
Investors should note Enterprise Product’s investment-grade credit rating of BBB+ from Standard & Poor’s and Baa1 from Moody’s, a relatively high credit rating among MLPs. In addition, Enterprise Products has excellent distribution coverage. The partnership reported a distribution coverage ratio of 1.5x in 2018, and 1.7x distribution coverage in the 2019 first quarter. This meant Enterprise Products generated approximately 70% more distributable cash flow than it needed to pay its distribution in the first quarter. A high payout ratio bodes well for the future, as it provides some valuable cover in case the industry enters a downturn. It also allows the company to raise its distribution each year, as it has done for 59 consecutive quarters.
On April 8th, Enterprise Products declared a quarterly distribution of $0.4375, for an annualized distribution rate of $1.75 per unit. Based on the recent share price, Enterprise Products yields 6%, a very high yield considering the S&P 500 Index, on average, yields just 2% right now.
Investing in MLPs carries unique risk factors and considerations for investors. But for those willing to accept the various risks, the rewards could be impressive for high-quality MLPs like Enterprise Products. Not only does Enterprise Products offer a high yield above 6%, it has a strong business model with industry-leading assets. The company generates more than enough cash flow to invest in growth and pay a high dividend, making Enterprise Products an attractive high dividend stock.