Enterprise Products Partners: Big Yield With Upside Potential (NYSE:EPD)

Dividend investing and growing one’s income stream is a good thing to be passionate about. To put it more bluntly, it’s better to collect stocks and bonds than to collect baseball cards and other things that don’t pay you anything in return.

While the market has rallied over the past week, it’s worth noting that the recovery has been rather uneven, with technology stocks surging the most, while a number of high income names remain rather cheap.

This brings me to Enterprise Products Partners (NYSE:EPD), whose share price hasn’t seen anywhere near the rally that technology stocks saw last week. This article highlights why value investors should take a hard look at this income-producing name.

Why EPD?

Enterprise Products Partners (issues Schedule K-1) holds valuable energy midstream and processing infrastructure across the U.S. It holds a dominant position in the NGL market and is one of the few companies to be able to capture value across the full hydrocarbon value chain. This position was further boosted by its recent acquisition of Navitas Midstream, giving EPD a strong presence in the Permian Basin.

EPD recently reported very strong third quarter results, with distributable cash flow growing by 16% YoY to $1.9 billion. This was driven by a record 17.5 trillion Btus per day transported on EPD’s natural gas pipeline. It appears that EPD is benefiting from heightened demand for U.S. hydrocarbons around the world, as noted by the CEO during the recent conference call:

Europe recently declared both, natural gas and nuclear energy as clean energy, resources that will be needed for years to come and Asia continues to make no bones about their long-term appetite for U.S. energy. We at Enterprise have been emphatic that it’s going to take all of the above in order to meet the world’s growing energy needs.

That’s why in addition to traditional midstream services, we’re also focused on investments in lower carbon projects, like carbon capture and sequestration, and providing blue ammonia into export markets. U.S. hydrocarbons remain badly needed to support countries who live in energy poverty, and to support our closest friends or allies in Europe who are in energy crisis.

We currently export about 60 million barrels of oil equivalent every month. It’s clear that the world wants and needs much more of what we have. We’re back on the road traveling domestically, internationally. We’re growing existing relationships and developing new ones and new opportunities.

Turning to the distribution, coverage was even higher during Q3, with a 1.8x distribution coverage ratio. Speaking of which, EPD increased its distribution by 5.6% during Q3 to $0.475 per quarter, equating to an impressive 7.6% yield.

Moreover, EPD currently has a $2 billion share repurchase authorization program, of which it has currently executed 31%. This includes 3.9 million common units that were repurchased on the open market during Q3 for approximately $95 million, and brings the YTD total repurchases to 5.3 million total common units. This equates to $10.1 million in annual savings from not having to pay distributions on these repurchased units.

Meanwhile, EPD maintains a strong BBB+ rated balance sheet with 3.26x leverage ratio, one of the lowest in the midstream segment. I also find the valuation to be attractive. At the current price of $25, EPD comes with an EV/EBITDA ratio of 10.06. As shown below, this sits towards the low end of its valuation range over the past 5 years. Analysts have a consensus Buy rating on the stock with an average price target of $31.20, which could potentially mean strong double digit annual returns including the dividend.

Investor Takeaway

Enterprise Products Partners is a high quality midstream name that offers a very attractive yield. It has strong fundamentals and a good growth outlook, with increasing need for U.S. hydrocarbons in Europe and Asia. The valuation also appears to be attractive at the moment. Value investors who prize high income would be served well to take a hard look at this name.

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