Units of midstream energy giant Enterprise Products Partners LP (EPD) have performed well in 2021, with a total return of 31.5% (including distributions) year-to-date through June 9th, reports Bob Ciura, contributing editor to Sure Retirement.
It has significantly outperformed the broader market in this time—the SPDR S&P 500 ETF (SPY) has delivered a year-to-date total return of 13.3%.
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Despite the impressive performance, EPD remains a buy. EPD still has a high yield of 7.3%, while the units remain reasonably priced. EPD continues to be a major winner from the pandemic reopening and economic recovery.
Enterprise Products is an energy infrastructure company. It operates midstream assets such as pipelines and storage terminals. Its assets include 50,000 miles of pipeline, as well as 260 million barrels of NGL, petrochemical, refined products, and crude oil storage capacity. Additionally, it has 14 billion cubic feet of natural gas storage capacity.
The initial reason behind recommending EPD was its high-quality business model, industry leading balance sheet, long-term growth potential, and high yield. These factors all remain in place today, which is why we reiterate our buy recommendation for income investors.
EPD continues to perform well as the energy sector recovers along with the broader economy. EPD’s distributable cash flow increased 12% in the first quarter, while the company had a distribution coverage ratio of 1.7 which indicates a highly secure distribution.
The company generated $2 billion of operating cash flow in the first quarter, along with $1.3 billion in free cash flow. EPD ranks among the top MLPs in terms of distribution safety.
In addition to a very high coverage ratio, EPD has a high credit rating of BBB+ from Standard & Poor’s, which is rare for an MLP.
It also has a modest weighted average cost of debt of 4.4%, having taken full advantage of low interest rates over the past several years. This allows the company to raise capital at attractive rates, which is crucial to its ability to invest in growth.
In that regard, EPD ended the first quarter with $3.4 billion of major capital projects under construction. The company expects to invest $1.6 billion in growth capital expenditures in 2021. We expect the company to grow its annual distributable cash flow by ~3% per year over the next five years.
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One of the most attractive aspects of EPD is the high distribution, currently yielding 7.3%. By contrast, the S&P 500 Index average dividend yield is just 1.4% right now. Not only does EPD provide a very high yield, but it also raises the distribution on a regular basis. EPD has increased its dividend for 22 consecutive years.
Units are still reasonably priced, even with a strong rally to begin 2021. Based on expected DCF-per-unit of $2.96 for 2021, units of EPD trade at a price-to-DCF ratio of 8.4.
Though our fair value estimate is currently 8.0, implying the units are slightly overvalued right now, EPD will still generate satisfactory returns through its high yield and future growth. Overall, we expect annual returns above 9% per year for EPD.
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