Certain things just go great together, like peanut butter and jelly, or baseball and beer. And for investors, nothing goes together so nicely as capital appreciation and dividend growth.
Those aren’t exactly the most exciting terms in the world, but if you can find stocks that both rise in value while at the same time providing an increasing stream of income, you have a winning combination.
In that vein, consider DCP Midstream Partners, LP (NYSE:DPM) — a $2 billion joint venture between Spectra Energy (NYSE:SE) and ConocoPhillips (NYSE:COP). With 61 plants and more than 61,000 miles of pipeline, it plays a critical role as one of the largest natural gas gathering networks in the United States and the largest natural gas liquids producer.
DCP Midstream has traded publicly since 2005, and its primary business involves the vertical integration of all things natural gas-related — DCP gathers, processes, stores, transports and markets it. The history of the firm dates back to 1929 when its predecessor company, Panhandle Eastern Pipe Line, was founded. Its only mission back then was to extend natural gas service to the eastern U.S. markets.
Click to Enlarge Panhandle did this for decades before expanding in 1951 into gathering and processing of natural gas as well, building its first petrochemical plant to convert natural gas into its liquefied version, known more commonly as LNG. Panhandle Eastern moved its headquarters to Denver from Houston when it acquired Colorado-based Associated Natural Gas in 1994.
Three years later, Duke Energy Corp. was formed through the merger of Duke Power and the newly renamed PanEnergy. Another couple mergers later, and DCP Midstream was born as a midstream natural gas player operating across several states and Canada.
So what separates DCP Midstream from all other natural gas plays? Well, aside from its ability to shepherd natural gas from the well to the end user — taking profits at each step along the way — DCP enjoys the benefit of the backing of its much larger operational parents. That means its borrowing costs are lower than competitors without such strong support. And yet at a market cap of just $2 billion, DCP Midstream still has a lot of room to grow.
While natural gas services remains the primary business function, DCP generates about 25% of its cash flows from wholesale propane and natural gas liquids logistics segments.
President and CEO Mark Borer has been charged with running the firm since 2006, when he left a leadership role at the parent company. He and the rest of the management team have clearly defined the partnership’s strategy into a three-fold objective: acquire, build and optimize.
DCP grows largely through acquisitions, choosing to focus on opportunities that are immediately accretive and either open new geographic markets or add to existing locations.
The “build” portion of its objective involves capitalizing on organic growth opportunities such as building out new pipeline operations, expanding drilling efforts to increase natural gas volumes, and construction of new propane terminals.
Lastly, management is focused on optimizing the profitability of existing assets through operating efficiencies and adding marketing opportunities.
DCP Midstream has purposely built out its facilities and pipelines to include excess capacity, which has allowed DCP to contract for new supplies of natural gas at minimal incremental costs compared to many of their competitors. Management has been able to grow both revenues and operating income by double digits during the past five years and operating cash flow four out of six years since going public.
DCP participates in an aggressive hedging program to not only help manage the volatility of future natural gas prices, but also to bring stability to quarterly cash flows as well.
Despite the variability of natural gas prices, DCP’s focus on acquisitions and operating efficiency has helped it deliver nearly 34% annual earnings growth during the past five years. Morningstar analysts are expecting cash flows to continue to grow at roughly 20% per year for the next several years because of favorable processing margins and recent acquisitions.
In addition to capital appreciation that has sent shares to a new all-time high last week, DPM stock provides an annual dividend of $2.56 per share, or 5.7%. That’s a good yield for a solid producer, and it’s trending higher, with the company increasing dividends for four consecutive quarters. Put DCP Midstream in your pipeline.