Friday, November 5, 2010

Enterprise Products Partners L.P. (EPD) Dividend Stock Analysis

Enterprise Products Partners L.P. provides a range of services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the continental United States, Canada, and Gulf of Mexico. This dividend achiever has raised distributions for thirteen consecutive years. As a master limited partnership, the company doesn’t pay taxes at the corporate level. The tax bill is paid by the unitholders, which receive K-1 forms that give detailed explanations on how to report each significant item of income that Enterprise Product Partners has generated.

Over the past decade, this dividend stock has delivered a total return of 18.30% annually.
Over the past decade, Enterprise Products Partners L.P. has managed to increase cash flow per share by 10.20% annually. The beauty of pipeline MLPs is that they generate stable revenues, as they have virtual monopoly on oil and gas transportation for a particular pipeline in a particular region. In addition to that, volumes transported of natural gas or oil are much less volatile than the price of the underlying commodity.

The company has managed to raise annual distributions at a rate of 8.60% annually over the past decade. At 9%, dividends double every eight years. The current rate of distribution is double the amount paid every quarter nine years ago.

The company’s cashflow payout ratio has steadily decreased over the past decade from its highs reached in the early 2000s. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
As a master limited partnership, Enterprise Product Partners tends to distribute more than what it earns in a given year. Because it distributes almost all of its cashflow to unitholders, the company grows by issuing additional units or taking on debt.
There are several risks to EPD in particular. The first risk is that interest rates could increase, which will make master limited partnerships unattractive relative to risk-free fixed income instruments. This could also increase the cost of capital for the company and hinder future growth. Another risk with master limited partnerships is that the government could decide to abolish the MLP structure, in order to generate more revenues to fill in the huge deficits that the US is running. A similar move by the Canadian government in 2006 to phase-out the Canadian royalty trust structure led to losses in principal and income for investors who were relying exclusively on Canroys. The most important thing is to be diversified and not have over 10-15% of one’s portfolio in master limited partnerships such as Enterprise Product Partners (EPD) or Kinder Morgan Partners (KMP).

Another risk that will be mitigated for this MLP is incentive distribution rights, which allow the general partner a cut of distributions above certain thresholds. This would not be an issue for EPD, since on September 7 it announced plans to purchase the general partner that held those rights, and merge it with one of its wholly-owned subsidiaries. This move would lower the cost of capital for EPD.

The return on assets dropped off sharply between 2000 and 2003, before starting to recover since 2003. Master limited partnerships typically grow by purchasing new assets, which is one reason that this indicator would fluctuate over time. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Overall I find Enterprise Product Partners (EPD) to be an attractive dividend stock for current income and distribution growth. It yields 5.50% and trades at a P/E of 21.40. I would consider initiating a position in the stock on dips below $39.

Full Disclosure: None

Relevant Articles:

- Kinder Morgan Energy Partners (KMP) Dividend Stock Analysis
- Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors
- General vs Limited Partners in MLP's
- MLPs for tax-deferred accounts

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