Enterprise Products Partners L.P. (EPD): How Safe Is This High-Yield MLP’s Distribution?

Valuation

The best way of valuing an MLP is based not on earnings but on cash flow and yield, since these are the most crucial metrics that directly apply to the very reason that investors own these securities.

Enterprise Products Partners is currently trading at 13.9 times operating cash flow, which is a bit higher than its historical norm of 10.4. However, when you look at the current yield of 6.3% things look somewhat different.

For example, over the past 13 years Enterprise’s yield has ranged from 3.42% to 11.67%, with a median of 5.77%. So the current yield is about 9% higher than its historic norm. Enterprise also looks relatively undervalued when you consider that the midstream MLP industry median yield is 5.7%.

However, much of the company’s future ultimately hinges on the success of its growth projects and how the domestic energy landscape evolves. Given management’s track record, the stock appears to be reasonably priced, if not perhaps somewhat undervalued.

Conclusion

At the end of the day, even conservative midstream MLPs such as Enterprise Products Partners are at the mercy of capital markets and commodity prices, if for no other reason that demand for their growth projects require higher oil & gas prices. Energy prices also impact customers’ ability to pay their bills and honor their contracts with midstream operators.

However, with its strong balance sheet, best-in-class management team, long growth runway, and solid track record of paying a secure and growing distribution in many different economic / interest rate / energy price environments, Enterprise Products Partners L.P. (NYSE:EPD) appears to represent one of the safer high-yield MLPs in the market.

If you understand and are comfortable with the risks involved with investing in MLPs and desire exposure to the energy sector, Enterprise Products Partners is an interesting candidate to consider as part of a well-diversified income growth portfolio.

Disclosure: None

Additional Links:

(1) https://www.eia.gov/dnav/ng/hist/n9050us2A.htm

(2) https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCRFPUS2&f=W

(3) https://www.bloomberg.com/energy