Enterprise Products Partners: The Power Of DRIP

Sep. 5.13 | About: Enterprise Products (EPD)

Enterprise Products Partners (NYSE:EPD) is well known in the MLP world as one of the strongest midstream entities in the US. With years of expansions in the pipeline, including ground breaking projects in the Gulf, EPD's distributions are destined to continue their upward climb. Since 1999, EPD's distributions have averaged a 7.5% CAGR, and are backed by a 1.4x coverage ratio, which implies the payout could increase by 40% and still be covered by today's existing cash flows.:Click to enlarge

EPD currently trades for ~$58.30/unit, implying a 4.66% yield off the $2.72/unit distribution on a trailing twelve month (NYSE:TTM) basis. However, if we peer into the future and apply EPD's 7.5% CAGR, we could assume the dividend will be $2.924 this time next year, implying a ~5% yield on a forward twelve month basis. To reward unit holders even further is the distribution reinvestment plan {DRIP}, which boosts the payout by 5% when enrolled. Including this 5% boost, EPD pays 4.89% on a TTM basis and could yield 5.25% on a forward looking basis.

This exercise is helpful to investors as the standard dividend rates quoted by brokerages and websites list the dividend on a TTM basis, without giving much insight into the future. Unless we have a time machine handy, we should be more interested in the future of EPD if we own it today; so let's examine what future returns we can expect from the distribution if we utilize EPD's DRIP program.

We will assume EPD's 7.5% CAGR will continue for the next 5 years, as well as the 5% DRIP incentive. I feel comfortable using this growth rate considering EPD's 1.4x coverage ratio and future project pipeline, ( I recently highlighted EPD's growth here). Assuming we bought 100 shares at $58.30 and DRIPed the distributions, here's how our returns in terms of distributions will look:

So for $5,830 in stock, we would yield $1,974.50 in compounded distributions or 33.86% in returns, which would bring our total unit ownership up to $7,804.50 under our growth estimates and continued DRIP bonus assumptions. Of course, this does not include unit price appreciation, which one could assume will grow as well if EPD does in fact continue its feverish 7.5% distribution CAGR, but this is for a different discussion.

Summary:

The point of this exercise is to fully grasp the expected value of EPD's growing distribution with compounded interest on a forward looking basis, which is supported by a strong new project pipeline, a 1.4x coverage ratio, and a 5% DRIP bonus designed to reward unit holders.

Even if unit price stays static over the examined 5 year period, returns will still be solid assuming EPD's 7.5% distribution CAGR continues, which could total 33.86%. This estimated return is much higher than investors might guess after a simple back of the envelope calculation using the advertised 4.6% yield on yahoo. Personally, I think EPD's unit price will appreciate as well, as is usually the case with MLPs with rising yields. As in the past, EPD investors should continue to be rewarded in the future by EPD's strong distributions. On the recent pullback, EPD may be worth a closer look.

Disclosure: I am long EPD, VZ, GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.