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Enterprise Products Partners: Management Can Raise The Distribution More


  • Enterprise Products Partners is an excellent midstream company with a large market presence and a respectable distribution of nearly 6%.
  • Over the years, the business has continued to hike the distribution, but the company could likely do more if it wanted.
  • With fairly little debt compared to its equity value, and strong cash flows, the firm is in a great financial position.
  • Not only is the distribution safe, but investors should expect it to only grow over time.
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One of the more interesting pipeline operators and midstream service providers on the market today is Enterprise Products Partners (NYSE:EPD). With a market capitalization of $63.69 billion, it’s a huge player in the space, plus its yield today amounts to 5.86%, which, though not as high as other pass-through entities investors may invest in, is attractive.

Last week, management decided to raise their distribution yet again, leaving me to question just how high, and for how long, management can continue to grow the payout to shareholders. What I found in my research is that not only is Enterprise’s distribution secured, but it’s possible that, if management wants, it could continue to grow the payout even as the company’s share count soars higher.

A cautionary tale

Enterprise has a long history of growing its distribution. Last week, management announced their 57th consecutive distribution increase and their 66th total quarterly distribution since the business went public in 1998. The rise in the latest quarter wasn’t much, nominally speaking. For the quarter, management declared a distribution of $0.4325 per share, up from the $0.43 per share seen a quarter earlier. On an annualized basis, this implies a distribution of $1.73 per unit. In aggregate, this implies a payout each year of $3.78 billion to the firm’s shareholders.

One way to measure whether a business is paying out too much of its cash toward distributions is to look at its dividend payout ratio. This is calculated as the distribution divided by the firm’s earnings per share. In the graph below, I decided to plot this out for Enterprise for the five years ending in 2017. What it shows looks rather distressing at first glance. According to my figures, Enterprise is paying well above what it is earning each year. Looking at this, investors might conclude that the company will

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This article was written by

Daniel Jones profile picture

Daniel is an avid and active professional investor.

He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (38)

I would liketo ask the author, Mr JOnes, who likely is it that EPD will convert to a corporation nxt year? The utility forecaster seems to think that this conversion could happen next year. Naturally I do not want the conversion-would owe a ton of taxes. Thoughts? amy
@ amymaddalozzo

My thought is that such a conversion would definitely surprise ("shock" is maybe too strong a word) me.

(long a bunch of ET)
I think I read recently that EPD planned to borrow $3 billion. Is that correct?
CincinnatiRick profile picture
One of the more interesting pipeline operators and midstream service providers on the market today is Enterprise Products Partners (EPD).

"Interesting" is hardly the word I would use to describe EPD. I have held it for 15 years now and it is my largest MLP holding. Even with the DRIP, I sometimes have had to make market buys in order to keep my basis above zero and avoid capital gains liability. But, in the spirit of a comment thread fascinated with metaphor, it's about as "interesting" as watching paint dry. It's a steady eddie and reliable rock, anchor or cornerstone (take your pick) for a portfolio. And, if you are far enough along in your journey to be interested in estate planning, it can help you stiff Uncle Sam when your heirs get that step up in basis.

Ah, but you yearn for that excitement, dealing in "interesting" investments? Your steady eddie, EPD, can even help you there: the equity value can allow you to avoid the need to tie up cash when selling puts. Feast on that metaphor: it's a workhorse too. But "interesting"? Not.
James Hanshaw profile picture
Good article, I like Enterprise Products for other reasons too - their developments will require the products of two of my favourites that I featured yesterday in

Honeycomb888 profile picture
I've owned EPD for a decade and consider it a SWAN. I'm fine with small dividend increases, as long as it means safety through the hard times. Good company. Good holding.
marriottmare profile picture
Long Epd
PoorBoyJohnny profile picture
I started to buy EPD 3 years ago & have been adding more shares over the past 2 years to reach my comfort zone. With 1500 shrs. held I am pleased with their current div. rate and slow but steady increases. I can plan future expenses knowing that the income will be there to foot the bills. It would be nice to see EPD readjust their rate upwards to their prior 1/2 cent per qtr. in 2019 which would give me a nice cushion of funds in reserve. It is not my best stock as a income producer in my retirement portfolio but it does rank as one of the top 5. My best overall stock is an untouchable master that produces double of what EPD does but I have owned this stock for almost 30 years now with income exceeding $1200/ qtr. It is one of the supreme utilities today. None other than 'NEE'. it use to be FPL until they changed their name a few years ago. To me the 'BEST' utility in the market BUT the most expensive for those who are thinking about buying it now. My original $9,800 investment waaaaay back in the mid '80's was in the $38/$40 range and the cash dividends received over the past 5 years has returned all my invested funds leaving me with just over 1000+ shrs.@$173+ per shr. and a market value of $173,100. Not to bad for a poor boy raised in poverty some 70 years ago. I made it to the 'BIG TIME' and proud of my accomplishments.
apparently , bc of your humble beginnings, you know the value of a dollar and the importance of saving and investing, regardless of your income.....that is discipline, good job
apparently , bc of your humble beginnings, you know the value of a dollar and the importance of saving and investing, regardless of your income.....that is discipline, good job
Two Important thoughts come to mind whenever I think of EPD and their drive to fund their capital internally rather than borrow the way many other MLP's do, (For the record I don't necessarily consider that an negative in all cases, but with rising interest rates, It may put some of the less well run operations in a world of hurt). First, the fact that they are raising capital this way "does not" keep them from continuing to develop and expand their various profitable businesses at the rate that they have been. I want to see their strong diverse businesses continue to pace the MLP market. Secondly, I really would like to see how their actual ROI plays out against what they said it would do when the project was developed. Please deliver at or above the expected returns so that share growth might pick up a little more. In an increasing interest environment, slower increases of per unit payouts for less debt on the balance sheet is something I will accept as an investor. For the sake of transparency I have been long on EPD in a large position for 15 years.
I haven't been long EPD nearly as long as you, but I'm catching on.
Good analysis which establishes EPD performance has been far stronger than management feared. So there was more than enough cash to fund new investments.

The pipes are filled. More importantly, fractuanating or ngl processing plant utilizations are much higher. The very profitable export markets continue to develop.

The equity price or market required return on equity is high or excessive. Which means from a standard finance model, management should retain and invest more cash flow. Rather than issuing new equity. For owners long term return.

But dividends or rather distributions do matter to equity valuations in this space. Partnerships are primarily bought for current income.

On a forward projection, coverage ratios are not just strong. In fact, coverage becomes absurdly high. Increases in distributions is how management communicates just how good and sustainable the business is.

Memories of the Obama engineered near death experience of so many American oil and gas companies is still fresh. WHich is why EPD can be invested in at such an absurdly low price. But management will have to signal with cash flows just how strong performance is and is most likely to remain - relative to the current unit market price.
@Mad Who
"Obama-engineered near-death experience"?


However, I absolutely agree with you that cash flows are a lovely signal, and I hope they continue to increase. I decided to increase my EPD position after Mr Teague & company indicated they would throttle distribution increases to 2.5% per year. A nearly 6% dividend, plus nearly-guaranteed share-price increases, is about as good a deal as I expect to find.
For the conservative investor seeking midstream limited partnership exposure, EPD is hard to beat.

Long-time EPD long.

Retired income/dividend-growth investor
I own EPD . I cannot remember where I read it but I made a note in my investment research about an EPD announcement that it would raise the payout by $0.0125 a unit each quarter of 2018 (an increase of only 3% for the year). As sdkcat stated this is so that EPD can self-fund.
Several quarters ago EPD stated that it was restricting distribution growth this year to build equity. The goal is to have are a self financing growth model. So more profits will be retained until retained earnings reach the targeted level. Once achieved EPD will be able to finance growth from existing cash flow and new debt that does not add to leverage. So no dilutive share issues to finance projects. This strategy makes a lot of sense. With the Duncan family reinvesting several hundred million of distributions each year, EPD will have a very distribution supportive model. What the author perceives as room for distribution hikes is really profits that are being accumulated to support the financing strategy.
NGL story, EPDs forte, is a multi decade winner.
Enpase profile picture
Thank you for your article on EPD. It is one of three anchors of my portfolio. Safe, conservative, generous well covered dividend, best of breed management team, excellent future growth projects in the works with more following and... I could list more. This stock was first purchased 15 years ago by me with many more purchases along the way. I hope my grandchildren remember their grandmother and grandfather decades down the road. Gems like EPD, to me, are rare. Thanks again.
What are the other two anchors?
Enpase, your other two anchors, please. Inquiring dividend investors want to know!
Encase, I could not agree more. EPD is also one of the three anchors in my portfolio. I think Jim Teague and the management team does an excellent job of creating value---and it doesn't hurt that insiders buy this stock quiet regularly.
Hopefully they will revert back to 5% annually
Considering other pipe line assets and current changer regarding the ongoing
transactions I am happy with EPD’s cautious approach to increasing distributions.
EPD is an MLP.....and one doesn't evaluate MLP's "distribution" safety/upside potential using the typical "dividend" payout ratio/percentage based on earnings.
Big Fat Dummy profile picture
....reads the article to completion and then comment.
We grow our language with the evolution of usage. I'd gift you an example if I could think of one.
Chris, please please don't incent such awful uses of English. (haha)

Daniel, as you've found, EPD is a rock-solid conservative growing MLP enterprise, pun intended, which understands that growing its unit distribution too fast can lead to disasters like KMI or straightened circumstances when oil prices and usages dives. Hard to find any bears on EPD so you're preaching to the choir.

Try your hand at some others that might present less stellar metrics but have increasing prospects. PAA or Enbridge or MPLX, or a fund like TPZ. Good luck.
Reddist profile picture
When used as a transitive verb, grow traditionally meant “to grow crops or to grow a beard.”

These days, however, some people have converted grow into a transitive verb. Thus we see:

'Our policies will grow the economy.'

This usage originated in Bill Clinton’s 1992 campaign. Since then, most politicians and many members of the media use the expression.

Personally, I prefer to restrict the transitive definition of grow to beans and beards, and we urge you to do the same.

Example: The farmer’s business grew rapidly when he decided to grow barley.
auto44 profile picture
This is no place for the spelling and grammar police. I would be very happy if you and your partners in crime ,the fashion police would butt out. Both of these police departments belong on the Jr. High words are your friends site or some other hokey venue. Do have a good day. Feel free to criticize my spelling and grammar I have thick skin and need a good laugh.
@ auto44

"This is no place for the spelling and grammar police."

Sure it is.
auto44 profile picture
Are you a card carring member of both organizations? Trying to prove how sophisticated you are by criticizing someones spelling or grammar skills is just low in my opinion instead off sticking to the subject and showing your ignorance there you attack on some inconsequential matter. But you got some attention and that is what you wanted so congratulations.
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