Seeking Alpha

It's The Best Time In 8 Years To Buy 6.6% Yielding Enterprise Products Partners

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About: Enterprise Products Partners L.P. (EPD)
by: Brad Thomas
Brad Thomas
Dividend growth investing, REITs, newsletter provider, value
Summary

While past performance is no guarantee of future results, there are three reasons why we fully expect 20% undervalued Enterprise Products Partners to deliver 17% CAGR long-term total returns.

Recession-resistant business model means this 6.6% yield is safe in all economic and market conditions.

Strong long-term growth prospects and a rock solid self-funding business model.

Attractive valuation results in market-smashing return potential.

This article was co-produced by Dividend Sensei and edited by Brad Thomas.

There's nothing more we love than being able to recommend a high-yielding 11/11 quality Super SWAN trading at a significant discount to fair value.

Enterprise Products Partners (EPD) is the highest-quality midstream stock in America and a legend when it comes to delivering generous, safe and steadily growing income, as well as market-spanking, long-term returns.

Enterprise Products Partners Total Returns Since 1999

(Source: Portfolio Visualizer) portfolio 1 = EPD

The best management team in the industry's laser-like focus on long-term value creation has helped EPD triple the market's returns over the past two decades, with average rolling returns that are double or triple that of the S&P 500 over every time frame.

It's also achieved this with 68% less volatility over time, meaning nearly a three times better reward/risk ratio (excess total returns/negative volatility, aka "the Sortino Ratio").

While past performance is no guarantee of future results, there are three reasons why we fully expect 20% undervalued Enterprise Products Partners to deliver 17% CAGR long-term total returns. That's because it's now trading at just 7.4 times EBITDA, the lowest valuation since October 2011.

(Source: F.A.S.T Graphs, FactSet Research)

It's the best time in eight years to buy Enterprise, making it not just a "very strong-buy" but one of the best 6.6%-yielding income growth stocks you can buy today.

Photo Source

Reason 1: Recession-Resistant Business Model Means This 6.6% Yield Is Safe In All Economic And Market Conditions

Enterprise is the only Super SWAN in its industry with 5/5 in dividend safety, a 3/3 business model and 3/3 management quality/corporate culture.

Let's start by examining EPD's asset base, which is one of the largest, most vertically integrated and highest quality in the industry. Don't just take our word for it, here's Morningstar's Stephen Ellis explaining:

It is the pre-eminent midstream infrastructure company, vertically integrated with best-in-class assets at nearly every point in the midstream value chain. It can aggregate supply of every type of hydrocarbon from multiple sources in major producing basins (Permian, Eagle Ford, DJ, Piceance, Green River) and deliver it to multiple end markets (refiners, petrochemicals, exports). These assets are the linchpins for both shippers and end-users." - Morningstar (emphasis added)

Enterprise's assets are the result of $68 billion in investments over the past 20 years and include 5,700 miles of crude pipelines that transport 1.3 million barrels per day of crude transport capacity, which it can ramp up to 1.8 million with zero additional capital spending.

Those pipelines connect the most important U.S. shale formations in Texas, Oklahoma, and New Mexico including the Eagle Ford, Permian Basin, Cushing, and Gulf Coast export hubs.

(Source: investor presentation)

EPD's vertically-integrated asset base means it serves the needs of virtually all parts of the midstream supply chain, and takes a fee on average, six times between the oil/gas field and the final customer.

(Source: investor presentation)

Enterprise has raised its payout 71 times since its IPO including 61 consecutive quarterly hikes (15 straight years and counting). Management has confirmed it's pursuing dividend champion status.

With our upcoming distribution payment in November, we began our 22nd year of consecutive distribution growth. We continue to get closer to the 25-year Dividend Aristocrat benchmark, which is a select group of stocks with over 25 years of consecutive dividend increases, sort of, the best of the best of dividend growth – in best of the best of dividend growth stocks." - CEO Jim Teague

Due to the S&P 500 rule against MLPs, EPD can never officially become an aristocrat. But that's a mere technicality that shouldn't cause any conservative income investors to avoid owning the old faithful of midstream stocks.

The key to Enterprise's impressive payout growth streak is the stability of its cash flow. Here's CFO Randy Fowler explaining the nature of the contracts underpinning its newest $3.6 billion in growth projects on the company's Q3 conference call.

"Approximately, 77% of the contracted volumes associated with these projects under construction are with investment-grade customers and 70% of the volume-weighted contract links are 14 years or more."

Enterprise's NGL fractionators, in particular, show the kind of conservative capital allocation discipline this MLP is famous for. EPD won't break ground on new NGL plants unless it has 100% of capacity under volume committed contracts, which run for 15 years. Those contracts are with industry giants like dividend aristocrats Exxon Mobil (XOM) and Chevron (CVX), which have the strongest balance sheets in the industry (and A credit ratings).

Morningstar's analysis of EPD's contracts concludes that about 80% are volume committed take-or-pay contracts for at least 10 years in duration, meaning shippers reserve capacity and pay EPD even if they ship not a drop of oil or NGLs. New contracts are for 15 to 20 years in duration, and also virtually 100% volume committed with some of the nation's largest and financially strongest energy producers.

(Source: investor presentation)

44% of its contracts are with A-rated companies, which over the last 30 years have defaulted on less than 4% of their bonds.

(S&P 2018 Global Default Report)

(Source: investor presentation)

In total 85% of cash flow is fee based, meaning very little commodity sensitivity.

(Source: investor presentation)

You can see that by comparing EPD's distributable cash flow (equivalent to REIT AFFO) against oil prices. Even when crude crashed 76% between 2014 and 2016 EPD's cash flow was stable and has been rising consistently over time.

(Source: investor presentation)

EPD's profitability has likewise been highly stable, averaging 12% over the past 10 years. High single digits are what most MLPs are able to achieve and analysts expecting EPD to achieve 13% returns on invested capital over the next decade. That's realistic given management's superb track record of maintaining double-digit ROIC even during the darkest days of the 2016 oil crash.

The key to Enterprise's success and legendary industry status as the ultimate source of safe high midstream yield is the management and corporate culture. Hands down they are the best at what they do.

Just how good is EPD management? Here's Morningstar's Stephen Ellis singing its praises.

We ascribe an Exemplary stewardship rating to Enterprise’s executives, who represent some of the best and brightest in the industry. We see them as chess masters operating in an environment where everyone else is playing checkers... Beyond the depth of management’s experience in nearly every aspect of the energy and chemical industries, their consistent alignment with LP unitholders’ interests over time substantially differentiates them from their midstream peers...

In a difficult industry environment, Enterprise has remained conservative and sensible stewards of capital. This is a tactical executive team that plays the long game... In Enterprise’s case, we continue to think the deep-seated apathy toward the firm is misguided, especially master limited partnership related concerns. Enterprise is unlikely to switch to a c-corp structure, given it can fund its spending program without issuing equity, and the need to issue equity to fund projects has forced similar conversions in the past, in our view."

The market is fearful that EPD might somehow negatively impact unitholders, such as by "checking the box" to convert to a C-corp in order to qualify for inclusion in major indexes.

But CEO Jim Teague, who has over 40 years of experience ,and Chairwoman Rand Duncan Williams (daughter of EPD's founder) are very unlikely to do that.

For one thing, Jim Teague owns 1.7 million shares directly, paying him $3 million per year in tax-deferred distributions. The Duncan family, via ownership of EPCO, EPD's general partner, own 30% and have received billions in tax-deferred payments. Converting to a C-corp would have a big tax liability for long-term investors, most of all management itself.

And as Morningstar points out, self-funding EPD has no need to raise equity growth capital to fund its organic growth. Thus this possible overhang on the stock is irrational and just helps create a better opportunity to build your position in the highest quality, thriving MLP in America.

Reason 2: Strong Long-Term Growth Prospects And A Rock Solid Self-Funding Business Model

In Q3 alone EPD added $3.6 billion to its growth backlog which now stands at $9.1 billion.

(Source: investor presentation)

In 2020 management expects to spend $3 to $4 billion on growth. The pace of new projects added to the backlog indicates this may become the new long-term normal for EPD, which would tie it with Energy Transfer (ET) for the third-largest long-term growth runway in the industry.

(Source: investor presentation)

EPD is now fully self funding its growth with zero reliance on equity capital raises. Its retained cash flow has been growing steadily over time, hitting 38% in the last year and 41% in the first half of 2019.

In the first nine months of 2019 EPD retained $2.1 billion in cash flow after paying distributions which means an annualized $2.8 billion per year. That's sufficient to cover about 80% of next year's growth spending plans.

  • 3.3 debt/adjusted EBITDA vs 4.5 industry average and 5.0 or less safe per credit rating agencies

  • Interest coverage ratio: 5.0 vs 3.7 industry average and double the 2.5 level that is safe for this industry

EPD's balance sheet is tied with other SWAN midstreams like Enbridge (ENB), TC Energy (TRP), and Magellan Midstream Partners (MMP), for the highest credit rating in the industry, BBB+ stable.

(Source: investor presentation)

During the oil crash, many MLPs got into trouble with too much debt. Leverage ratios on some large midstreams hit eight or even nine. EPD's leverage ratio never exceeded 4.4, still a very safe level. And since then it's fallen to 3.3, the lowest of any blue chip midstream operator. That's courtesy of funding 68% of growth with retained cash flow over the past year.

With EPD now funding 80% of its growth with retained cash flow it's leverage could fall to below three within a year or two. At which point it could become the first midstream in North America to ever receive an A credit rating.

Barring a significant increase in interest rates that would allow EPD to refinance its very safe bond profile at even lower costs in the future, further widening its moat via an unbeatable cost of capital advantage.

(Source: investor presentation)

How strong is EPD's balance sheet? Well despite having nearly 50% of its long-term debt in the form of 30-year bonds, it has been able to steadily reduce its interest costs over the past decade while extending its weighted duration to a record high 19.3 years. That means EPD has locked in the profitability of its growth projects for the next two decades.

And since it's now self funding, its cash cost of capital (what matters to income investors) is just 4.5%. And EPD's long-term borrowing costs continue to fall. Back in June, the MLP sold $2.5 billion in bonds including

  • $1.25 billion in 10-year bonds at 3.125% interest

  • $1.25 billion in 30-year bonds at 4.2% interest

That's $2.5 billion in bonds at a weighted maturity of 20 years and an average interest rate of 3.6%. The point is that EPD's balance sheet is a fortress, credit rating agencies, and bond investors love it, and it has $6.2 billion in liquidity remaining under its revolving credit facilities and $1.2 billion in unrestricted cash on the balance sheet.

Add to that $2.8 billion in annualized retained cash flow and you can see why EPD is the best in breed midstream. In a highly capital intensive industry, EPD has the greatest access to low-cost capital of any midstream in North America and is consistently generating some of the highest profitability as a result.

OK, so that's why EPD is the best positioned of any midstream operator to profit from the growth of US oil and gas. But how big of a growth opportunity does it really have?

(Source: investor presentation)

There are more than 500,000 undrilled shale locations in the US, with about 300,000 of those being in Texas' Permian and Eagle Ford formations. EPD is a national midstream giant but its highest concentration of assets is in Texas, where it provides mission-critical services to Eagle Ford and Permian oil and gas producers.

How long would it take to drill up to 670,000 wells? Morningstar estimates US shale production will remain strong for the next 30-plus years.

(Source: investor presentation)

Over the next five years, US oil and condensate production is expected to rise 35% to a record 16.2 million bpd. Virtually all that net growth is expected to come out of Texas, where EPD is most dominant. In fact, by 2025, the Permian Basin alone, if it were its own country, would rank as the fourth-largest oil producer on earth, second only to Saudi Arabia, Russia, and a Permian free US.

By 2030 OPEC (hardly a fan of US shale) estimates that US shale production will double to 16 million bpd, and virtually all of that growth will come out of Texas.

Now you can understand why I and so many analysts are so bullish about EPD's asset base, which is so focused on that prolific energy-producing state. EPD has invested more than $6 billion into its Permian assets alone over the past few years with much more to come.

But while 25% of EPD's growth spending is going to servicing the epic oil boom in Texas, the likes of which the earth hasn't seen since Saudi Arabia's 1970's production boom, 80% of growth spending is focused on natural gas liquids or NGLs.

(Source: investor presentation)

Like most oil and gas trends, Texas leads the way in the NGL boom, which produces low-cost inputs for America's thriving petrochemical industry.

(Source: investor presentation)

Between 35% and 60% of new US energy production will go to exports, to service the insatiable demand growth from emerging markets like China and India.

(Source: investor presentation)

US energy exports are soaring since Congress lifted the ban on oil exports in 2016 (which was put in place during the 1970s oil crises). As early as 2024 the US might overtake Saudi Arabia as the world's largest energy exporter, creating the single greatest geopolitical power shift in history.

What about the fear that EVs are going to crush the oil industry, aka "Tesla (NASDAQ:TSLA) is going to bankrupt oil companies?"

First off, the age of oil and gas isn't going to end anytime soon. The most conservative estimate of when oil and gas will represent less than 50% of global energy is from BP (NYSE:BP), and that's not likely until 2035.

(Source: BP investor presentation)

Most other analysts/government agencies estimate that even long after 2050 oil and gas will still provide most of the world's energy.

Here's what McKinsey's 2050 Energy Outlook report concluded

Fossil fuels will dominate energy use through 2050. This is because of the massive investments that have already been made and because of the superior energy intensity and reliability of fossil fuels. The mix, however, will change. Gas will continue to grow quickly, but the global demand for coal will likely peak around 2025. Growth in the use of oil, which is predominantly used for transport, will slow down as vehicles get more efficient and more electric; here, peak demand could come as soon as 2030.

By 2050, the research estimates that coal will be down to just 16 percent of global power generation (from 41 percent now) and fossil fuels to 38 percent (from 66 percent now). Overall, though, coal, oil, and, gas will continue to be 74 percent of primary energy demand, down from 82 percent now. After that, the rate of decline is likely to accelerate." -Mckinsey

McKinsey models 30% of global autos being electric by 2030. Even if oil demand peaks in 2030 however, according to the US Energy Information Administration 6% decline rates in legacy oil fields mean that 80% of new oil production through 2040 will merely replace declining production.

And who is going to be picking up the slack for declining fields around the world? The US, courtesy of the epic fracking boom in the Permian, where, according to Exxon, production costs are expected to fall from $80 in 2014 to $20 by 2023.

Here's another reason I'm not worried about EVs crushing the oil industry. According to the International Energy Agency, by 2030 33% of global oil production will go into plastics. Worried about recycling killing demand for plastics?

(Source: investor presentation)

Don't be. Because even assuming a major increase in recycling demand for plastics is expecting to grow at least 2.5% CAGR through 2040, doubling total ethylene demand. NGLs are used to make ethylene and EPD just announced another Gulf Coast fractionation project, which has 100% of capacity under volume committed contracts for 15 years.

The US petrochemical industry is so bullish on plastic demand that it's investing more than $200 billion into expanding production and export capacity on the Gulf Coast (mostly in Texas) and creating almost 1 million jobs in the process.

(Source: investor presentation)

In the 2020s chemical executives are telling EPD management that a second wave of capacity growth could be coming, fueling even more NGL demand (and good-paying jobs).

How well positioned is EPD to profit from these secular trends? Very. Take exports for example. Enterprise already has 5 million bpd of export capacity and is growing that rapidly.

(Source: investor presentation)

By 2020 EPD will have the capacity to export 3.5 million bpd of crude. That's enough to handle virtually all crude exports from the US from this MLP alone.

EPD isn't being careless with its growth spending though. It's locking down contracts for those volumes and playing a long game, investing for a future when the US Energy Information Administration estimates US energy exports could reach 10 million bpd (by 2040).

(Source: investor presentation)

Enterprise's crown jewel and the "moatiest" asset it owns is the Houston Shipping Channel, which is rapidly becoming one of the world's largest export hubs and is literally irreplaceable, at any cost. EPD has invested $8 billion into the Houston Shipping Channel over the past few years, with more investments planned in the coming years.

(Source: investor presentation)

EPD's shadow backlog projects it has yet to get full contracts for stands at $1 to $6 billion, after shifting $3.6 billion to the official growth backlog in Q3.

That means $10 to $15 billion in growth projects EPD will likely be able to undertake over the next five to seven years.

What about the threat of climate change regulatory risk? After all, Sen. Warren is running for president and has promised to kill fracking entirely.

(Source: Michael Boyd)

First of all, let's get one thing very clear. Fracking has been good for US CO2 emissions. That's not my opinion, it's objective fact as reported by the US Energy Information Administration.

(Source: investor presentation)

US CO2 emissions since 2007 are down 15%, mostly due to the replacing of coal-fired power plants with gas ones (50% less CO2 per unit of energy).

The US might be pulling out of the Paris Climate accords, but literally no developed country is doing more to actually reduce emissions rather than just talking about it.

According to European Union Data and BP, in 2017 US CO2 emissions fell 0.5%, following a 0.5% reduction in 2016. Now contrast this with other "green" countries who signed onto the Paris accords.

  • China: +1.6% in 2017

  • Canada: +3.4%

  • Spain: +7%

  • France: +2%

  • Germany: +0.1%

If you care about climate change then the US is objectively doing more about this issue, thanks to fracking, than any of our major peers.

Of course, acknowledging that doesn't always seem like the most effective path to the presidency. Even so, rest assured that fracking won't go away just like that no matter whoever's left standing in the executive branch after next November.

Here's Michael Boyd, a specialist in MLPs for Seeking Alpha, explaining why that's very unlikely.

Cutting right to the chase, a future president could not outright ban fracking across the United States on the first day. Most fracking takes place on private lands where any attempts to limit it would face legal challenges, particularly from the states themselves which have begun to count on it as a source of revenue and as a job provider.

However, the president could issue a variety of executive actions to outright restrict the ability for new drilling to take place on federal land. Note that I said new drilling; shutting in existing production is unlikely. Permanently sealing producing wells is expensive and does not meaningfully prevent risk of groundwater contamination. Most producers would try to avoid cementing wells shut ("plugging") instead idling wells, which is a higher risk process. If producers go bankrupt as a result of this policy, the costs would fall on the states to plug, another issue likely to draw ire and lawsuits.

Because of this, I think the base case should be that Elizabeth Warren or Bernie Sanders – if one of them wins – would act first to prevent new fracking on public lands, allowing natural well declines to run existing wells dry. Such a situation would virtually eliminate energy production on most onshore federal land inside of fifteen years. Further restrictions, most of which would involve private lands, would require Congressional involvement. That's a tougher reality to foresee, given the current Republican foothold."

In short, it would take 15 years of rabidly anti-fracking presidents, representing four consecutive presidential elections, to kill fracking and doom the US energy renaissance.

Might energy stocks stay in the doldrums over the perceived and overblown risks of a potential (but unlikely decimation) of US fracking? You bet.

But irrational fear and volatility are the best friends of the patient and disciplined income investor. Facts about fundamentals, not fears over what might possibly go wrong in a worst-case scenario, are what good investment decisions are based on.

And the facts are that US energy likely has a bright future, and no midstream more than 6.6% yielding Super SWAN Enterprise Products Partners is ready to cash in on the coming golden age of oil and gas.

Reason 3: Attractive Valuation Results In Market-Smashing Return Potential

The way we value a company is based on the time tested methods of Ben Graham and my fellow Dividend King and F.A.S.T Graphs co-founder, Chuck Carnevale.

(Source: imgflip)

We use market-determined fair value estimates. These are created by applying average multiples on dividends, earnings, and cash flows, during periods of similar fundamentals, to a company's consensus expectations for any given year.

Each metric (like operating cash flow, free cash flow, EBITDA, EBIT, and EV/EBITDA) gives a slightly different fair value estimate but the range of all of them likely includes intrinsic value.

The average of all of them (up to 10) provides a reasonable estimate of what a company is worth in any given year.

MLP

Quality Score (Out of 11)

Yield

Current Price

2019 Fair Value

2020 Fair Value

Discount To 2019 Fair Value

5-Year CAGR Total Return Potential

Enterprise Products Partners

11 - Super SWAN, dividend champion in 2024

6.6%

$27

$33

$34

20%

9% to 25%

(Sources: F.A.S.T Graphs, FactSet Research, Reuters', Ycharts, analyst consensus, Gordon Dividend Growth Model)

Enterprise's market-determined historical fair value for 2019 is about $33 and $34 for 2020. Next, I consider the quality of the company to determine whether its margin of safety (discount to fair value) is high enough to warrant anything stronger than a "reasonable buy" recommendation.

Classification

The Margin of Safety Requirement For 11/11 Quality Companies

2019 Price

2020 Price

Reasonable Buy

0%

$33

$34

Good Buy

0%

$33

$34

Strong Buy

10%

$30

$31

Very Strong Buy

20%

$26

$27

Super SWANs like Enterprise are good buys at fair value and if they become 20% or more undervalued than that's good enough to earn a "very strong buy" recommendation.

This is because companies of this caliber (quintessential Buffett "wonderful companies") don't tend to trade at large discounts for very long. Buying them at 20% or more undervalued tends to be a great way to earn very strong returns even with modest growth rates.

Here's Enterprise's growth profile, composed of all the reliable growth estimates I could find.

  • FactSet long-term growth consensus: 4.0% CAGR

  • Reuters' five-year growth consensus: 10.9% CAGR

  • YCharts long-term growth consensus: 6.0% CAGR

  • Morningstar long-term growth estimate: 7.0% CAGR

  • F.A.S.T Graphs extrapolated long-term growth rate: 6.9% CAGR

  • Historical growth rate: 0% to 25% CAGR

  • Realistic growth range: 3% to 11% CAGR

  • Historical fair value: 9 to 12 times EBITDA

Our total return potential ranges include a conservative and bullish end, created by applying realistic growth rates to the historical fair value multiples that are most appropriate for a company. For most corporations, that's PE, for REITs FFO and for energy/yieldCos/LPs its EBTIDA.

If Enterprise only grows at 3%, slower than analysts expect or is likely given its current growth backlog and buyback ability, it would still likely generate nearly 10% CAGR long-term returns.

(Source: F.A.S.T Graphs, FactSet Research)

That's compared to 2% to 7% CAGR market returns expected from the leading asset managers in the world.

If Enterprise continues to aggressively build its backlog it might grow as fast as Reuters' expects, about 11%, and then likely trade at the high end of its fair value range.

(Source: F.A.S.T Graphs, FactSet Research)

Which could deliver up to 25% CAGR total returns or more than triple your investment over five years. 9% to 25% is a wide range, so here's the Dividend Kings' base case.

(Source: F.A.S.T Graphs, FactSet Research)

We use the mid-range 10.5 P/EBITDA multiple and the average of all the consensus estimates, which is for 7% CAGR long-term growth.

That shows EPD is likely capable of 17% CAGR total returns over the next five years, matching its historical total returns over the past 20 years.

But while Enterprise is the highest-quality midstream name you can own, that doesn't mean it doesn't have a risk profile you need to consider before buying it.

Risks To Consider

Enterprise's fundamental risks stem mainly from its major bet on natural gas liquids, which now represent 80% of its growth backlog.

While it has 100% capacity with minimum volume commitments in place for its latest fractionation projects if the global economy slows sufficiently and for long enough, then NGL demand might grow slower than expected.

That could cap EPD's ability to replace its current backlog of growth projects at a similar rate as in recent years.

The good news is that buybacks and a low valuation would allow EPD to earn 13.5% EBITDA yields on repurchased stock which means that it will still be able to grow. However, the upper end of its growth range does require that NGL demand grow as expected, which is outside of management's or the petrochemical industry's control.

The other short-term risk to fundamentals is 15% of cash flow from spread-based businesses. This is higher commodity exposure than many other large midstreams have (most have 87% to 98% fo cash flow from fixed-fee contracts).

Might crashing commodity prices put EPD's distribution in jeopardy? Barring another depression that's not likely to happen. A 1.7 coverage ratio and the fortress-like balance sheet mean the payout is safe and likely to keep growing at its current pace in all economic, industry and market conditions.

However, in the event of a recession, commodity prices might plunge 50%, which means EPD might face a short-term 7.5% hit to cash flow, which represents between one and three years of its growth potential.

While such an event (which is highly unlikely) wouldn't threaten its thesis, it certainly could send the share price falling a lot lower.

Valuation risk on EPD is rather low, meaning you can buy with confidence that you're acquiring top quality assets, run by a world-class management team, at a very attractive price.

But valuation risk merely reduces volatility risk, it doesn't eliminate it. EPD has historically been 68% less volatile than the S&P 500, as it's basically an energy utility. But even low beta stocks can experience periods of irrational market panic.

(Source: investor presentation)

EPD's cash flow sensitivity to oil prices is very low. But that doesn't mean the stock doesn't frequently track crude anyway. The correlation to oil prices can fluctuate over time but in the past five years has been very high, including 100% in the first half of 2019.

Enterprise Products Peak Declines Since 1999

(Source: Portfolio Visualizer) portfolio 1 = EPD

During both recessions since its IPO Enterprise has proven defensive by falling less than the S&P 500. However, as you can see, the MLP bear market is now in its sixth year and there's no telling when it will finally end with a return to new record highs.

EPD peaked at $41 and 16 times EBITA in late 2014, a 34% overvaluation bubble that popped when OPEC declared war on US shale producers. At 7 times 2020 EBITDA, EPD is now incredibly underpriced and as long as management keeps delivering the expected growth it's 100% certain to eventually recover to its fair value.

When that will occur I can't say, no one can. This just means that long-term conservative income investors have more time to build their positions waiting for the inevitable day when the market finally wakes up to EPD's objectively excellent fundamentals.

But one final risk detail must be discussed, which is proper portfolio construction and asset allocation.

None of my recommendations are ever meant to be bond alternatives but part of a well constructed and risk-managed portfolio. These are the risk management guidelines that we use in our four model portfolios, Fortress, High-Yield Blue Chip, Deep Value Blue Chip and $1 Million Retirement (for Dividend Kings).

Here's a reasonable and prudent way to integrate EPD into a balanced portfolio that's appropriate for conservative income investors in retirement or approaching retirement.

EPD Focused Balanced Portfolio

(Source: Portfolio Visualizer)

This is a 70/30 stock/bond portfolio with 60% invested in SPHD, which is a 4.1% yielding low volatility ETF. The weighted yield on this portfolio is 4.2% which is higher than SPHD itself thanks to EPD's 6.6% very safe yield. The 30% allocation to bonds, with a weighted duration of 8, means that income investors would face far less volatility than owning a 100% stock portfolio, or even a standard 60/40 stock/bond portfolio.

EPD Focused Balanced Portfolio Total Returns Since 2013

(Source: Portfolio Visualizer)

This portfolio would have been 25% less volatile than a 60/40 portfolio and delivered basically the same returns, with slightly higher average rolling returns across all time periods.

(Source: Portfolio Visualizer)

When the S&P 500 fell almost 20% during the late 2018 correction, a 60/40 portfolio fell 8% but this one just 5%.

That was the same amount it fell during the early 2018 correction, which was half as much as the broader market. Basically, this kind of balanced approach to pursuing maximum safe yield, with proper bond allocations to hedge against recessions, is how you should approach portfolio construction and integrate my recommendations.

Bottom Line: 6.6% Yielding Enterprise Products Partners Is 20% Undervalued And A Very Strong Buy

Enterprise Products Partners is the highest quality midstream stock you can own, with the best assets, the best management team, and a long growth runway that includes decades of capex spending and after that tapers off, increasing buybacks. Rising cash flow per unit is what will keep the distribution rising steadily, not just for a few years, but likely for the next three decades or longer.

The 6.6% yield is not just very safe but has been growing like clockwork every quarter for 15 years and counting. That includes through no less than four major oil crashes, two recessions, the worst financial crisis since the Depression, and dozens of market pullbacks and corrections.

Today EPD is trading at the lowest P/EBITDA since October 2011, making it the best time in eight years to buy the highest quality and safest midstream stock in North America.

With Enterprise currently 20% undervalued, and realistically offering to continue its historical 17% CAGR total returns over the next five years, I consider this 6.6% yielding Super SWAN a very strong buy.

Author's Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

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.