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

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

One of the stocks I’ve held in my portfolio the longest is a pipeline company. Enterprise Product Partners (NYSE:EPD), which I have owned for over 15 years. Although I’ve owned it for so long, I’m just as excited to own it today as I was when I first purchased the title.

Let’s look at five reasons why I suggest buying stocks like there’s no tomorrow.

1. Consistency

Enterprise has been one of the most consistent companies over the past two decades. This comes from having a large integrated intermediary system diversified in terms of geography, products and markets. The company owns more than 50,000 miles of pipelines used to transport various hydrocarbons, such as natural gas, crude oil and natural gas liquids (NGLs), as well as more than 300 million barrels of storage liquids. It also owns processing plants, fractionators, petrochemical facilities and deep-water docks.

Enterprise’s assets touch most of the midstream value chain. This helps create a natural hedge for the company, as it can direct, store and upgrade products to create the most value for customers and itself.

Additionally, typically 80% or more of the company’s business is fee-based, so it has modest exposure to commodities and spreads. Additionally, about half of its paid revenue comes from long-term customers, meaning it gets paid whether its pipelines and assets are used or not.

Enterprise’s business model has allowed the company to consistently increase its Distributable Cash Flow (DCF) per unit (operating cash flow minus maintenance capital expenditures (capital expenditure)) most years, while keeping it fairly stable in difficult environments, such as when oil prices collapsed between 2014 and 2016.

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

Image source: Getty Images.

2. High yield and growing distribution

Enterprise’s consistency has allowed it to increase its distribution for 25 consecutive years. This includes such difficult times as the financial crisis, the oil price collapse and the early days of the pandemic.

The company generates a lot of cash flow and has always taken a conservative stance when it comes to leverage, which is also why it was able to constantly increase its distribution. Leverage currently stands at 3, which is low for the midstream sector. (The company defines leverage as equity credit-adjusted net debt in junior subordinated notes divided by adjusted EBITDA.)

Enterprise currently has a robust forward yield of 7.2% based on its quarterly distribution of $0.515. With a coverage ratio of 1.7 over the past 12 months and low leverage, the distribution is well covered and expected to continue to increase in the coming years, extending Enterprise’s current streak.

3. Growth Opportunities

Enterprise is also expected to accelerate its growth after deciding to slow down its plans at the start of the COVID pandemic, given the uncertainty at the time. The pipeline company increased its organic growth investments to $2.9 billion last year and currently plans to spend about $3.5 billion on growth projects this year and next.

Projects take time to develop and then scale up, so the impact of these projects should begin to be felt later this year and beyond. The company has typically achieved a 13% return on invested capital over the past few years. This means that for every $1 billion spent on growth investments, it would generate $130 million in additional annual gross operating profit.

Meanwhile, Enterprise also recently announced that after five years, it had finally received a major deep-water port license needed for its Marine Oil Terminal (SPOT) project. If the project is completed, it will make Enterprise a significant player in crude exports.

Overall, the company is poised to re-enter growth mode at a time when it has excess cash to spend.

4. Inexpensive assessment

Despite its high yield and growth opportunities, Enterprise still trades at an inexpensive valuation of a forward enterprise value (EV) to EBITDA multiple of 9.3. This is one of the most common methods for valuing midstream stocks because it takes into account their net debt while accounting for non-cash expenses.

EPD EV to EBITDA chart (forward)EPD EV to EBITDA chart (forward)

EPD EV to EBITDA chart (forward)

That’s well below the 15-plus multiple Enterprise often traded at before the pandemic. It is also well below the 13.7 multiple that the midstream master limited partnership (MLP) traded at between 2011 and 2016, when it had higher leverage and less attractive business models.

5. Deferred taxes on distributions

Enterprise has a long history of consistent operational performance and has strong future growth plans. Additionally, it offers high yield, growing distribution, and inexpensive valuation by historical standards.

What could make investing in stocks even more attractive? What about tax-deferred distributions?

That’s right. As an MLP, Enterprise technically pays a distribution that is widely considered a return of capital and not a dividend. The return of capital portion of the distribution is tax-deferred and reduces the cost basis to the owner and therefore is not taxed until the shares are sold.

Now, this benefit comes with investors receiving a K-1 tax form at tax time. However, this additional form is only a minor inconvenience and can usually be easily handled by an accountant or tax program. Tax-deferred distributions are well worth the extra paperwork.

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

5 Reasons to Buy Enterprise Product Partner Stock Like There’s No Tomorrow was originally published by The Motley Fool

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