Enterprise Products Partners (EPD 0.48%) built its business to produce steady income. The midstream giant owns a diversified portfolio of pipelines, processing plants, petrochemical complexes, storage terminals, and export facilities crucial to supporting the energy industry. Those assets generate very predictable revenue backed primarily by long-term contracts and government-regulated rate structures.
The master limited partnership (MLP) distributes a little more than half of its stable cash flow to investors each year. That payout currently yields 7.4%. At that rate, every $1,000 invested in Enterprise Products Partners would produce nearly $75 of annual income. Here’s why the MLP is such a great option for income-seeking investors.
Built on a nearly unshakable foundation
Enterprise Products Partners has generated $8 billion of cash flow from operations over the past 12 months. It has distributed 53% of this cash to investors (about $4.3 billion) while using another 3% to repurchase some of its common units. It retained the remaining money to fund capital projects (33% for growth and 5% for maintenance) and strengthen its already elite balance sheet.
The company ended the third quarter with a 3.0 leverage ratio. That was right in the middle of its 2.75-3.25 range. Leverage has steadily improved from an already solid 4.1 in 2017, driven down by its steadily rising earnings. That low leverage ratio is a big reason why Enterprise has the highest credit rating in the midstream sector (A-/A3). These features give the company lots of financial flexibility.
Enterprise Products Partners’ stable cash flow, relatively low payout ratio, and elite balance sheet put its high-yielding distribution on a very firm foundation.
The fuel to keep growing
Enterprise Products Partners has steadily increased its distribution over the years. 2023 marked its 25th straight year of distribution growth. That streak is showing no signs of stopping anytime soon.
The MLP has invested about $2.9 billion into capital projects over the past year to maintain and grow its asset base. It has completed $2.7 billion of growth capital projects over the past few months, which will start supplying incremental income in the coming quarters. That visible earnings growth should give the MLP the fuel to increase its distribution again next year.
Meanwhile, the company still has plenty of growth ahead. It recently secured $3.1 billion of new capital projects that should come online in 2025. Add in the $3.7 billion of projects it already had under construction, and the MLP has $6.8 billion of projects currently in its backlog. That drives its view that it can invest at least $3 billion in growth capital projects in 2024, about the same as this year. Capital spending could top out at $3.5 billion in 2024 if it secures additional projects under development. The company’s current slate of capital projects should come online through 2026, giving it lots of visibility into its future growth.
In addition to organic expansions, Enterprise Products Partners has a long history of making accretive acquisitions. Last year, the company spent $3.2 billion to acquire Navitas Midstream and opportunistically purchased 580 miles of pipelines and related assets in a $160 million deal. Navitas supplied incremental income and new growth opportunities in the Permian Basin, while the pipeline purchase helped optimize and expand its existing systems in the Texas Gulf Coast. The MLP’s elite balance sheet gives it ample financial capacity to make additional acquisitions as opportunities arise. Future deals would give it even more fuel to increase its distribution.
A top-tier passive income producer
Enterprise Products Partners has been an income-generating machine over the years. That should continue in the future. The MLP has the financial strength and visible growth drivers to continue increasing its distribution in 2024 and beyond. That makes it a great stock to buy for income heading into the new year.
Matthew DiLallo has positions in Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.