Pipeline and processing company Enterprise Products Partners (NYSE: EPD) has a long history of paying investors a growing distribution. In fact, since going public nearly 20 years ago, this MLP has increased its payout 62 times, including for the last 53 quarters. That streak isn't expected to end anytime soon because the company has $9 billion of growth projects under construction that should supply it with the cash flow needed to keep going.
However, the company recently took a notable step to provide another layer of security so that its high-yield payout, which currently stands at 6.5%, stays safe. It did so by moderating the rate of distribution growth, which will put it in an even stronger financial position over the next few years. It's just one more reason income-seekers should seriously consider this top-notch energy infrastructure company.
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Already a cut above
Enterprise Products Partners has always been one of the more fiscally conservative MLPs. Before the oil market downturn, many of its peers were comfortable distributing all their cash flow to investors each quarter, while relying entirely on the capital markets to fund their growth initiatives. However, that more aggressive approach came back to bite them when the capital markets started tightening as oil prices crashed. Because of that, most have had to slash their distributions in recent years and have used that cash to pay down debt and self-finance some growth projects.
Enterprise Products Partners, on the other hand, has always maintained a more conservative distribution coverage ratio, usually above 1.2 times. Because of that, the company has retained substantial excess cash flow to help finance growth projects. Over the past year, for example, the company has held back $635 million in cash, which has helped fund a significant portion of the $4 billion in projects it expects to place into service this year. Further, another benefit of this more conservative approach is that the company has one of the highest credit ratings among MLPs, which gives it better access to the capital markets and at cheaper rates than its lower-rated rivals.
Holding back a little more
However, despite already being one of the most conservative MLPs around, Enterprise Products Partners is planning to take things a step further by slowing the pace of distribution growth even though it has an extensive inventory of growth projects on the cusp of entering service. The plan will be to increase its payout by $0.0025 per unit on a quarterly basis through the end of next year, which is down from the prior quarterly growth rate of $0.005 per unit.
This new plan aims to retain additional cash in the near term so the company can self-fund a more substantial portion of capex. Enterprise estimates that by 2019, it will generate enough excess after paying a growing distribution to fund the equity portion of a $2.5 billion capital budget, or about $1.25 billion assuming 50% equity. Once it reaches that point, Enterprise could reaccelerate distribution growth or use some of its retained cash to repurchase units.
That potential for a buyback program would be unique among MLPs, though it's something more energy companies are considering since most equity valuations remain below their historical norms in the aftermath of the oil market downturn. Several have already announced buybacks, including pipeline giant Kinder Morgan (NYSE: KMI), which recently unveiled a $2 billion buyback, and oil giants ConocoPhillips (NYSE: COP) and Anadarko Petroleum (NYSE: APC), which also plan to buy back billions of dollars in shares. In Kinder Morgan's case, the driving force behind the buyback is that its stock remains dirt cheap, trading at less than 10 times distributable cash flow, which is 50% less than its peak value and well below the mid-teens multiple of rivals. Meanwhile, both ConocoPhillips and Anadarko see a buyback as a better use of their cash than spending it to accelerate growth because the market remains saturated with oil. So, instead of drilling more wells to boost oil output, both can meaningfully increase production per share by executing their repurchase programs. Enterprise's buyback could have a similar impact on cash flow per unit by growing it at a faster rate.
The ultimate low-risk, high-yield investment
Enterprise Products Partners' decision to slow distribution growth only further solidifies its position as a top option for risk-averse income seekers. That's because it will widen the coverage cushion while making the company even less reliant on the capital markets to finance growth and giving it even more financial flexibility, including the potential to start repurchasing its units. That combination of factors means investors can sleep soundly knowing that distributions from Enterprise will continue heading into their brokerage accounts each quarter and that they will keep growing, though at a slightly slower pace.
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Matthew DiLallo owns shares of ConocoPhillips, Enterprise Products Partners, and Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan, long January 2018 $30 calls on Kinder Morgan, and short December 2017 $19 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.