High dividend yields are typically associated with higher risks. But that isn’t necessarily always the case. One such exception is Enterprise Products Partners (EPD 0.51%), whose high yield is too attractive to pass up.
Let’s take a closer look at why this top pipeline operator’s stock seems an appealing buy.
A strong balance sheet
Those following energy stocks for long likely know that Enterprise Products Partners is a company well-regarded for its financial discipline. This discipline allowed it to maintain its distribution when most of its peers slashed theirs during the 2014-2015 commodity price rout. One metric that shows Enterprise Products’ balance sheet strength is debt-to-EBITDA ratio.
EPD Financial Debt to EBITDA (TTM) data by YCharts
As the chart shows, Enterprise Products Partners’ debt-to-EBITDA ratio is not only the lowest among its top peers, but it has also historically been so. The ratio shows how much funds a company has got to meet its debt obligations. A lower ratio is better.
Enterprise Products Partners has raised its distribution for 23 consecutive years. As of this writing, the stock is trading at a yield of 7.7%, much higher than its 10-year average yield of 6.1%.
EPD Dividend Yield data by YCharts
Enterprise Products Partners stock’s yield is also higher compared to its peers Kinder Morgan, ONEOK, Williams Companies, and Energy Transfer.
Why Enterprise Products Partners stock’s yield is high?
There could be a couple of reasons why the yield on Enterprise Products Partners stock is high. First, the company’s conservative stance might be too conservative for investors looking for growth. The company invested just $1.8 billion on growth projects in 2021, compared to $4.2 billion invested in 2019. Lowered investments have restricted Enterprise Products’ EBITDA growth.
EPD EBITDA (Quarterly) data by YCharts
Notably, as market conditions improved, Enterprise Products Partners has already invested $3.6 billion in Q1 this year, including $3.2 billion for the acquisition of Navitas Midstream. This would add to the company’s EBITDA in the coming quarters. Moreover, the company has $4.6 billion of major projects under construction, expected to be in-service through 2025.
Another possible factor restricting Enterprise Products stock’s rise could be its MLP (master limited partnership) structure. Some investors may avoid investing in the company due to the added hassle of form K-1s. Although Enterprise Products has been raising its distribution consistently, the company rues that the growth hasn’t been appreciated in the market -- a reason why it moderated its distribution growth in 2018 to self-fund its capital expenditures through internally-generated cash flow.
A must-own dividend stock
Financial discipline is a key attribute of Enterprise Products Partners. That may sometimes mean giving up some growth in favor of conservatism. But this exactly comes handy when energy markets become challenging. Moreover, the company still focuses on growth, albeit disciplined, that allowed it to grow earnings over years, as the EBITDA chart above shows.
In all, there is nothing to worry about Enterprise Products Partners’ high yield. Rather, it is an opportunity to add this top dividend stock to your portfolio to generate regular dividend income, no matter the market conditions.
