Dividend Investor Portfolio #3: Moving Energy
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Dear Investor,
Welcome to the 3rd edition of TipRanks’ revamped Dividend Investor Newsletter. We look forward to investing alongside you and hope you enjoy our newly minted Dividend Investor!
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Market-Moving News: April 8, 2024
Markets rallied on Friday, reversing their previous declines, but still locked in a sharp weekly drop as strong economic reports dimmed the outlook for future rate cuts, while Treasury yields spiked, and oil prices jumped. However, investors’ optimism was rekindled on Friday by the economy’s strength due to robust labor market reports. U.S. payrolls surged, topping even the most optimistic estimates. Moreover, the unemployment rate edged lower and workforce participation increased, while wages continued rising.
While the job market’s strength spells a lack of urgency for cutting rates, the prospective delay in monetary easing is now perceived as bullish. A change in monetary policy would likely only be caused by the fact that there’s no recession in sight, signaling robust corporate earnings.
This week, the assumption about the continued strong corporate profitability will begin to be put to the test, as the Q1 2024 earnings season kicks off on Friday with reports from the leading banks. With the stock valuations near their two-year high, earnings – and even more importantly, further guidance – will draw increased investor attention and pave the path forward for stock-market performance.
Investors will also focus this week on the incoming economic data and minutes from the March FOMC meeting. Although Chairman Powell said that the recent hotter-than-expected job market data doesn’t “materially change the overall picture” regarding policy outlook, several more overly strong data points may tip the balance to fewer rate cuts this year than were previously expected.
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This Week’s Quality Dividend Stock Idea
Enterprise Products Partners LP (EPD) is a leading North American provider of midstream energy services to producers and consumers of natural gas, NGLs, crude oil, refined products, and petrochemicals. EPD operates through four segments: NGL Pipelines & Services, Crude Oil Pipelines & Services, Natural Gas Pipelines & Services, and Petrochemical & Refined Products Services.
The company, headquartered in Houston, Texas, traces its roots to Enterprise Products Company, established in 1968 as a wholesale marketer of natural gas liquids. Today, with a market capitalization of $65 billion and annual revenues of $50 billion, EPD is one of North America’s largest energy infrastructure players.
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A New Aristocrat is Born
EPD became a Dividend Aristocrat in 2023 after raising its dividends for the 25th consecutive year. In January 2024, the company reported its 26th straight payout increase, and its strong financials support an outlook for many more years of dividend growth.
In addition to a long track record of dividend growth, Enterprise offers a compelling current dividend yield of 6.73%, almost twice the average for the Energy sector.
EPD features a notable rate of dividend growth for such a high dividend yield, coming in at a CAGR of almost 4% over the past decade. Moreover, thanks to several developments expected to accelerate its business growth, the payout increases are also projected to speed up to a CAGR of 5-6% in the coming years.
Enterprise stands out from other Dividend Aristocrats as it has both a high dividend yield and a high credit rating (“A-” at S&P and Fitch, “A3” at Moody’s, the highest for any energy midstream company).
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Pressing on the Gas
Enterprise Products Partners operates in the midstream (transmission) segment of the energy sector, which is less volatile than upstream (drilling) and downstream (refining) segments thanks to its lower vulnerability to changes in commodity prices. In fact, its income is derived from contract-anchored volume fees for energy products shipped through its systems. Simply put, EPD charges transaction fees regardless of market conditions, generating a steady income stream that is shielded from the ups and downs in commodity prices.
Along with the stability and visibility of revenues, EPD’s investment case is supported by its wide economic moat, geographic and asset diversity, and its ability to provide midstream services across the full hydrocarbon value chain. Enterprise is one of the largest midstream companies in the Americas, servicing most producing regions in the Lower 48 states. Its wide reach enables Enterprise to combine the supply of all fossil energy types from multiple sources and transmit it to numerous end markets, including exports.
Enterprise systems move natural gas, natural gas liquids (NGL), crude oil, petrochemicals, and refined products through more than 50,000 miles of pipelines. Its assets span pipelines, processing plants, deepwater docks, export terminals, and more. The company constantly expands its systems; thus, it started 2024 with $6.8 billion of approved major projects under construction, including new plants, pipelines, terminals, and more, most of which are forecast to be in service this year or in the first half of 2025.
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Global NGL Leader
The bulk of the new and expansion projects are in the field of natural gas liquids, further cementing EPD’s dominance in the acceleratingly valuable NGL market. During 2023, light products (NGL and Naphtha) accounted for half of global energy product demand growth. Interestingly, all of this growth was due to U.S. suppliers.
Enterprise was at the center of the party, having completed construction on $3.5 billion of NGL projects. As a result, the company’s gross operating profits from NGL pipelines and storage business surged by 21% year-on-year in Q4, thanks to record pipeline transportation, as well as marine terminal and natural gas processing volumes.
The U.S. holds about 45% of the global market share of LPG exports. Enterprise was among the first to recognize the potential of NGL to displace other energy sources in global markets and has worked to achieve a dominant position in the U.S. NGL exports since the mid-2010s. Today, EPD supplies larger NGL volumes than any country outside of the U.S. It is responsible for 35% of total U.S. NGL exports, equivalent to about 14% of total global exports.
The company doesn’t rest on its laurels but has continued to expand its hydrocarbon export capacity, planning to reach 100 million barrels per month. EPD strongly focuses its expansion efforts on the Permian Basin in Texas – the world’s fastest-growing oilfield site, expected to provide more than 90% of domestic NGL production by the end of the decade. Thus, in April, EPD announced the beginning of service in two new facilities in the Permian Basin, with plans to add more capacity over the next two years.
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A Record-Setting Year
Enterprise Products Partners closed 2023 on an optimistic note, with a dozen volumetric records along with strong earnings performance. Its pipeline systems moved a record 12.2 million BPD of hydrocarbons, up 9% from 2022. The company also established volume records in its NGL fractionation and marine terminal businesses. EPD continued to benefit from crude oil, natural gas, and NGL production growth in the Permian Basin, as well as resilient domestic and international demand for U.S. energy and energy products, which offset the effects of lower natural gas processing margins. This resulted in record net income, total gross operating margin, Adjusted EBITDA, and cash flow metrics in 2023.
Enterprise has a history of building assets that provide attractive long-term returns on invested capital. Its unlevered returns on invested capital (ROIC) have averaged 12% annually for the last 20 years, including periods of economic downturns. In the past three years, the company grew its revenues by a CAGR of 22.3%, while its adjusted EPS increased by 14%. On top of regular price increases that are generally included in its contracts, EPD’s revenue growth is expected to be further spurred by its strong organic expansion, coupled with value-enhancing acquisitions (such as a buyout of several assets from Western Midstream Partners this year).
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Total Return Outlook
Since its establishment, Enterprise’s capital allocation strategy has been a combination of four key principles: (1) investing in midstream energy infrastructure with attractive long-term returns on investment (including its own projects and acquisitions); (2) growing its cash distributions to shareholders; (3) performing opportunistic share repurchases; (4) supporting a strong balance sheet and providing financial flexibility. The company’s reliable, rising income streams have allowed it to comfortably achieve all of these targets.
Enterprise has a $2 billion share repurchase program in place. In Q1 2024, the company has repurchased $40 million of its common stock. Inclusive of these purchases, the partnership has so far utilized 48% of the buyback program.
Given that the repurchases are defined as opportunistic, it appears that the company’s board views the current EPD share price as moderate enough to conduct these repurchases. In fact, Enterprise’s valuation is in line with the averages for the Energy sector, though it comes in at the bottom of the range for its peers in the Oil and Gas Midstream industry. Furthermore, based on projected cash flows, EPD trades about 25% below its fair value, placing it firmly within a value category.
The stock continues to be moderately priced despite a strong recent performance, with EPD outperforming the S&P 500 index since the start of this year (not accounting for reinvested dividends). Wall Street analysts believe that the stock has more room to run, forecasting a 12% upside for the next 12 months.
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Investing Takeaway
Enterprise Product Partners LP is a Dividend Aristocrat featuring a solid dividend growth history and high yield. Moreover, the company’s forward-thinking business expansion and vast, diversified assets, as well as steady and rising demand for its services, provide for solid revenue growth in the coming years, supporting further dividend growth. In addition, EPD’s moderate valuation and the stock’s low volatility add compelling reasons to view it as well-suited to be a part of long-term income portfolios.
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Dividend Investor Portfolio
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Portfolio News
¤ JP Morgan’s (JPM) and BlackRock (BLK), the two U.S. financial behemoths held by our Dividend Portfolio, are set to report their Q1 2024 results this Friday. Wall Street analysts expect both firms to show strong year-on-year EPS growth on higher revenues.
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Recent Trades
None at the moment, although we are considering adding a stock to our portfolio. Stay tuned.
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Portfolio Attributes
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Current Portfolio
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
