Enterprise Products Partners (EPD) stock price declined to a decade low during the pandemic because of low oil and natural gas prices. Demand and prices plummeted as governments curtailed commercial activity. However, market demand has recovered while supply is still constrained for several reasons. Consequently, prices have soared. Enterprise Products’ stock price has almost returned to its pre-pandemic high despite higher revenue and earnings. The stock is undervalued, with a 7.5% dividend yield. Investors should take a more extended look at this dividend growth stock.
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Enterprise Products Partners L.P. (EPD) is an American pipeline company founded in 1968 and headquartered in Houston, Texas. The company is organized as a master limited partnership (MLP). It operates through four segments: NGL Pipelines & Services, Crude Oil Pipelines & Services, Natural Gas Pipelines & Services, and Petrochemical & Refined Products Services. Today, the company has a market capitalization of approximately $52.2 billion and currently trades hands for a little under $25 per share.
The pipeline giant owns about 50,000+ miles of pipelines for natural gas, oil, refined products, and petrochemicals. The company has a storage capacity of about 260+ million barrels of oil and refined products and 14 billion cubic feet of natural gas. In addition, Enterprise Products owns 24 natural gas processing facilities, 18 fractionators, seven splitters, 11 condensate distillation facilities, and 19 deep water docks.
Total revenue was $40,807 million in 2021 and $55,906 million in the last twelve months.
Enterprise Products (EPD) Stock Price and Fundamentals
|Dividend Rate (FWD)
|Dividend Yield (FWD)
|Payout Ratio (FWD)
Enterprise Products Partners Dividend Analysis
As a dividend growth stock, Enterprise Products has been raising its dividend for 25 years, making it a Dividend Champion. According to Portfolio Insight*, Enterprise Products’ past 5-year dividend growth average is about 2.51%, and the previous 10-year average is approximately 4.12%. Also, note that the most recent dividend increase was only 1.12%. This slight increase is concerning as a dividend growth investor because we would like to see companies continue to grow its dividend faster than inflation. But at the same time, the firm is not trying to boost the dividend without supporting cash flow and earnings.
Let’s remember that EPD stock continued to pay its dividend during the most challenging period in the last 100 years. While many businesses were cutting or suspending their dividend payments, EPD continued to pay its dividend. That is very impressive, especially because the oil industry was hit very hard in 2020.
The company has a whopping dividend yield of 7.60% as of this writing. This value is an excellent starting yield for those income-driven investors—especially for those investors who are leaving the bond market looking for higher yields. Income-driven investors may want a 4.5% yield or higher. So EPD meets that criterion easily.
Enterprise Products’ current stock dividend yield is 13 basis points higher than its own 5-year average dividend yield of about 7.47%. I like to look at this metric because it gives me a good idea if a company I am researching is undervalued or overvalued based on the current yield and 5-year average yield. This is because the price and yield inversely correlate with one another. If the price increases, the yield goes lower, and vice versa.
Is the dividend safe? We should always ask this question if we are looking for an undervalued dividend growth stock to invest in. This reason is why it is essential to look at the dividend payout ratio based on earnings and free cash flow (FCF). However, since this is a midstream company structured as an MLP instead of a C-corporation, we must look at distributable cash flow (OCF) per share to determine if the dividend is safe for an investor. Thus, the company translates its profits as distributable cash flow per share instead of earnings per share (EPS) like a conventional corporation.
Analysts predict that EPD will make $3.49 per share in DCF. Using the dividend (distribution) payment of $1.90 per share per year gives a payout ratio of 57% based on DCF. Having a ~58% dividend coverage with a dividend yield of over 7% is exciting.
On another note, capital expenditures have been decreasing since 2019. The company spent ~$4.532 billion in 2019 and only about $2.223 billion in 2021. This decrease helps increase FCF, which makes the dividend that much safer. Or the extra cash can be used to pay off debt.
Revenue and Earnings Growth / Balance Sheet Strength
Now let’s talk about earnings and revenue growth, which are the significant metrics we like to evaluate about a company. Without revenue growth, a company can’t have sustainable earnings growth and cannot continue paying a rising dividend. Since we cover Enterprise Products stock today, we will skip on earnings because it is not relevant for midstream pipeline companies. So instead, we will look at the growth of DCF.
For the past ten years, EPD has had revenue declining at a compound annual growth rate (CAGR) of (-0.82%). The decrease in revenue has to do with sales of assets throughout the years. Also, crude pipelines and services were hit hard because of COVID-19 shutdowns, which hurt 2020 revenues significantly.
Distributable cash flow has grown over time with short-term declines because of the Great Recession, oil price collapse, and the COVID-19 pandemic. The DCF was down from $3.43 per share in 2019 to $2.91 per share in 2020. This decline reversed itself in 2021 to $3.00 per share. Analysts expect Enterprise Products to earn $3.49 in DCF per share in 2022, a significant rebound.
Also, the company has a solid balance sheet. Currently, Enterprise Products stock has BBB+/Baa1, a lower-medium investment grade credit rating. The MLP has little debt due until after 2026. The leverage ratio is around 3.1X, below the target range of 3.25X to 3.5X. Also, the company has a high-interest coverage ratio of ~4.92X for an MLP. Generally, this shows me that Enterprise Products stock is a high-quality company with excellent growth prospects and a solid balance sheet.
One of the valuation metrics that I like to look for is the dividend yield compared to the past few years histories. I also want to look for a lower P/DCF based on the past 5-year or 10-year average. Furthermore, we like to use the Gordon Growth Model, a variation of the Dividend Discount Model (DDM). I use a Gordon Growth Model analysis because a business ultimately equals the sum of all the future cash flow that that business can provide. Since we are valuing Enterprise Products stock, we will use P/DCF.
Currently, EPD has a P/DCF ratio of 7.4X based on F.Y. 2021 DCF of $3.49 per share. The P/DCF is very low compared to the past 5-year P/DCF average of ~10X. If EPD were to revert to a P/DCF of 10X, we would obtain a price of $31.36 per share.
Now let’s look at the dividend yield. As I mentioned, the dividend yield currently is 7.60%. Looking at EPD’s 5-year dividend yield average of about 7.47%, there is a potential upside. For example, if EPD were to return to its 5-year average dividend yield, the price target would be $25.32.
The last item I like to look at to determine a fair price is the Gordon Growth Model analysis. I factored in a 9% discount rate and a long-term dividend growth rate of 3%. I use a 9% discount rate because of the high current dividend yield. The projected dividend growth rate is lower than its 10-year average but higher than the most recent increases. This gives us a fair price target of $31.67 per share.
If we average the three fair price targets of $31.36, $25.32, and $31.67, we obtain a reasonable, fair price of $29.45 per share. This gives Enterprise Products stock a possible upside of 18.3% from the current price of a little below $25.
Final Thoughts on Enterprise Products Partners (EPD) – A High Yield Stock
Enterprise Products Partners stock is one of the best midstream companies to pick from in today’s market. The company has an excellent starting dividend yield of 7.60%, and it is roughly 18.3% undervalued to its fair price of $29.45 per share. This represents an exciting and undervalued company in today’s market. In addition, EPD stock continues to invest in significant capital projects, providing investors with long-term growing cash flow.
Disclosure: Felix is long EPD
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My name is Felix Martinez, and I am a Dividend Growth Investor who has invested in dividend growth stocks for the past seven years. I also run a YouTube channel called FiscalVoyage. I have written for SeekingAlpha.com as well as SureDividend.com. I focus on undervalued dividend growth stocks with capital return and dividend income potential. Make sure to follow me on my YouTube Channel. See you there.