With a 6.80% cash distribution yield, Enterprise Products Partners (NYSE:EPD) will catch the eyes of income investors. The L.P. unit has remained sideways for the last year, but that’s acceptable if cash distribution continues to grow. I further believe that in the next 12-24 months EPD stock is likely to trend higher along with cash distribution growth. This makes the limited partnership unit worth considering at current levels.
Starting with the trend in cash distribution, the midstream natural gas and crude oil pipeline company paid $1.755 in 2019, $1.715 in 2018 and $1.6675 in 2017. Based on first quarter 2020 cash distribution, the annualized distribution is likely to be $1.78. Therefore, the L.P. unit has a track record of increasing cash distributions.
A quick mention that since Enterprise Products is an L.P. unit, cash distribution and cash distribution yield is more appropriate than dividend or dividend yield.
Bullish on Cash Distribution Growth
To understand the reason to believe that cash distribution will grow, it is important to look at the investment plan.
In 2019, EPD completed new expansion projects worth $5.4 billion. These projects commenced operations at different quarters in 2019. Therefore, 2020 will be the first full year of operation for these new projects. This provides visibility for revenue and cash flow upside.
In addition, the firm still has $7.7 billion in major projects that are underway. These projects will be completed through 2023. Projects include natural gas pipeline, Permian gathering & condensate projects, among others.
The bottom line is that Enterprise Products Partners is investing for growth and the results will be visible not just in 2020, but in the next few years. This is likely to ensure that the positive trend in cash distribution growth sustains.
Another important point to note is that the L.P. has secured long-term contracts for the new projects. There is clear revenue and cash flow growth visibility. I also want to add that according to the company, 77% of the contracted volumes are from investment grade companies. Therefore, even with challenging macro-economic conditions, I believe that cash flows are secure.
These growth factors are likely to take EPD stock higher.
Ample Financial Flexibility for Growth
Since Enterprise Products Partners has a significant capital expenditure plan, it is important to discuss financial headroom. In particular, since the company reported total debt of $27.9 billion as of September 2019.
Even with high debt, I believe that financing growth and increasing cash distribution is not a concern. The reasons are as follows:
- As of September 2019, Enterprise Products Partners reported debt-to-capitalization of 53.30%, which gives the company ample headroom to leverage for growth.
- For the first three quarters of 2019, the L.P. reported interest expense of $950 million. This implies an annualized interest expense of nearly $1.3 billion. However, with an annualized EBITDA of $8.2 billion, the company’s EBITDA interest coverage is 6.30. With smooth debt servicing capability, further leverage is not a concern.
- On an annualized basis, Enterprise Products Partners is likely to report operating cash flow in the range of $6 billion-$7 billion. With healthy cash flows, the unit can invest in growth projects through internal cash. As a matter of fact, Enterprise Products Partners is targeting 50% self funding of growth capital expenditure.
With these factors in consideration, it is not surprising that Enterprise Products Partners is rated BBB+. A quality credit rating does give confidence on financial headroom and ability to pay healthy cash distribution.
Final Thoughts on EPD Stock
With 50,000 miles of natural gas, NGL, crude oil, petrochemicals and refined products pipelines, EPD is a part of the backbone of the U.S. energy industry. In addition, the EPD has a robust storage, natural gas processing and exports facility. This makes the revenue diversified.
As the L.P. invests in growth projects in the coming years, cash flows will swell and investors will be rewarded through higher cash distribution.
Analysts at Crude Value Insights say that with shares near their low point and cash flows up, now might be a great time for investors to consider taking a stake in the firm.
With these factors in consideration, EPD stock is worth considering for the core portfolio.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
