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In the learning to fish series, investors are provided with suggested guidelines for choosing a potential candidate and one candidate is selected as our play of choice. We provide reasons for this choice and in doing so hope to impart some understanding to those who are new to the field of dividend investing. The suggested guidelines can be accessed here "Our suggested guidelines when searching for new investment ideas." These are not absolute rules. They are just suggestions and there are always exceptions to the rule. The goal is to try to satisfy as many of them as possible. Enterprise Products (NYSE:EPD) is an example of play that fulfills all the suggested requirements.

Reasons to like Enterprise Products:

  • Net income increased from $204 million in 2009 to $2.04 billion in 2011
  • A good yield of 5.10%
  • Cash flow per share increased from $3.15 in 2009 to $3.34 in 2011
  • Annual EPS before NRI increased from $0.96 in 2007 to $2.21 in 2011
  • A five year cash flow average of $2.37
  • A five dividend growth rate of 5.73%
  • A five year sales growth rate of almost 25%
  • Year over year projected growth rates of 14.24% and 7.32% for 2012 and 2013 respectively
  • Quarterly revenue growth rate of 10.5%
  • A strong quarterly earnings growth rate of 54.8%
  • Insiders have a 34.7% stake in the company
  • A strong relative strength score of 85 out of a possible 100
  • A good five year average yield of 6.8%
  • $100K invested for 10 years would have grown to $340K

Important facts investors should be aware in regard to investing in MLPs

Payout ratios are not that important when it comes to as MLPs generally pay a majority of their cash flow as distributions. Payout ratios are calculated by dividing the dividend/distribution rate by the net income per share, and this is why the payout ratio for MLPs is often higher than 100%. The more important ratio to focus on is the cash flow per unit. If one focuses on the cash flow per unit, one will see that in most cases, it exceeds the distribution declared per unit.

MLPs are not taxed like regular corporations because they pay out a large portion of their income to partners (as an investor you are basically a partner and are allocated units instead of shares) usually through quarterly distributions. The burden is thus shifted to the partners who are taxed at their ordinary income rates. As ordinary income tax rates of investors are typically lower than the income tax assessed on corporations, this arrangement is advantageous to the MLPs and generally most investors.

MLPs issue a Schedule K-1 to investors. Unrelated business income (UBI) above $1,000 is taxable in an IRA. This information will appear Box 20 in the schedule K-1. UBI is typically a very small number usually well below $1,000 and in some cases negative. If the MLP pays out distributions in excess of the income it generates, the distribution is classified as a "return of capital" and tax deferred until you sell your units. For more information, on this topic investors can visit the National Association of Publicly Traded Partnerships.

Company: Enterprise Products

Basic Key ratios

  1. Relative Strength 52 weeks = 85
  2. Cash Flow 5-year Average = 2.37

Growth

  1. Net Income ($mil) 12/2011 = 2047
  2. Net Income ($mil) 12/2010 = 321
  3. Net Income ($mil) 12/2009 = 204
  4. Net Income Reported Quarterly ($mil) = 651
  1. EBITDA ($mil) 12/2011 = 3867
  2. EBITDA ($mil) 12/2010 = 3137
  3. EBITDA ($mil) 12/2009 = 2690
  1. Cash Flow ($/share) 12/2011 = 3.34
  2. Cash Flow ($/share) 12/2010 = 1.63
  3. Cash Flow ($/share) 12/2009 = 3.15
  1. Sales ($mil) 12/2011 = 44313
  2. Sales ($mil) 12/2010 = 33739
  3. Sales ($mil) 12/2009 = 25511
  4. Annual EPS before NRI 12/2007 = 0.96
  5. Annual EPS before NRI 12/2008 = 1.85
  6. Annual EPS before NRI 12/2009 = 1.81
  7. Annual EPS before NRI 12/2010 = 1.39
  8. Annual EPS before NRI 12/2011 = 2.21

Dividend history

  1. Dividend Yield = 5.10
  2. Dividend Yield 5 Year Average = 6.8
  3. Dividend 5 year Growth = 5.73

Dividend sustainability

  1. Payout Ratio 09/2011 = 1.06
  2. Payout Ratio 5 Year Average 12/2011 = 1.32

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 6.4
  2. 5 Year History EPS Growth 12/2011 = 15.17
  3. ROE 5 Year Average 12/2011 = 12.81
  4. Current Ratio 12/2011 = 0.79
  5. Current Ratio 5 Year Average = 0.93
  6. Quick Ratio = 0.67
  7. Cash Ratio = 0.06
  8. Interest Coverage Quarterly = 4.33

Interesting Companies

For investors looking for other ideas detailed data has been provided on one additional company. Additional ideas might found in our latest article McDonald's: A Potentially Great Price.

Company: Cummins Inc (NYSE:CMI)

Basic Key ratios

  1. 5 year sales growth rate = 6.54%
  2. Long term debt to equity ratio = 0.11
  3. A great retention rate of = 83
  4. Relative Strength 52 weeks = 58
  5. Dividend 5-year Growth = 31.03
  6. Cash Flow 5-year Average = 5.59

Growth

  1. Net Income ($mil) 12/2011 = 1848
  2. Net Income ($mil) 12/2010 = 1040
  3. Net Income ($mil) 12/2009 = 428
  4. Net Income Reported Quarterly ($mil) = 455
  1. EBITDA ($mil) 12/2011 = 3040
  2. EBITDA ($mil) 12/2010 = 1977
  3. EBITDA ($mil) 12/2009 = 1001
  1. Cash Flow ($/share) 12/2011 = 10.63
  2. Cash Flow ($/share) 12/2010 = 6.77
  3. Cash Flow ($/share) 12/2009 = 4.06
  1. Sales ($mil) 12/2011 = 18048
  2. Sales ($mil) 12/2010 = 13226
  3. Sales ($mil) 12/2009 = 10800
  1. Annual EPS before NRI 12/2007 = 3.7
  2. Annual EPS before NRI 12/2008 = 4.21
  3. Annual EPS before NRI 12/2009 = 2.49
  4. Annual EPS before NRI 12/2010 = 5.17
  5. Annual EPS before NRI 12/2011 = 8.92

Dividend history

  1. Dividend Yield = 1.7
  2. Dividend Yield 5 Year Average = 1.37
  3. Annual Dividend = 1.33
  4. Dividend 5 year Growth = 31.03

Dividend sustainability

  1. Payout Ratio 09/2011 = 0.17
  2. Payout Ratio 5 Year Average 12/2011 = 0.19

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 22.23
  2. 5 Year History EPS Growth 12/2011 = 20.24
  3. ROE 5 Year Average 12/2011 = 22.42
  4. Current Ratio 12/2011 = 2.02
  5. Current Ratio 5 Year Average = 1.91
  6. Quick Ratio = 1.35
  7. Interest Coverage Quarterly = 82.25

Conclusion

The markets are still in a corrective mode, but in the interim, some sort of relief rally could (key word being could) take hold as they are extremely oversold. Long-term investors can use strong pullbacks to slowly start deploying money into long-term investments. A great way to get into a stock at a price of your choosing is to sell puts at strikes you would not mind owning the stock at. Investors looking for other ideas might find these articles to be of interest: Halliburton: A Potentially Great Entry Point, Or The chance to earn 8% and Showdown: General Electric Vs. Honeywell.

Disclaimer

This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.

Source: 13 Reasons To Consider Enterprise Products Partners

Additional disclosure: EPS and Price vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Earnings and growth estimates sourced from dailyfinance.com.