Dividend Investor Portfolio #32: Midstream Riches
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Dear Investor,
Welcome to the 32nd edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
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Market-Moving News: October 28, 2024
Stock markets snapped their six-week streak of gains as rising bond yields spooked investors. The S&P 500 (SPX) declined by 0.96% on the week, while the Dow Jones Industrial Average (DJIA) dropped by 2.68%. Meanwhile, the tech benchmarks Nasdaq Composite (NDAQ) and Nasdaq-100 (NDX) closed the week in the green, rising by 0.16% and 0.14%, respectively. Tech stocks were lifted last week by blockbuster quarterly results from Tesla, the first member of the “Magnificent” cohort to release its earnings this season.
Bond prices have been on the downslope since the Fed delivered its first rate cut, with the trend finally getting on the stock-investor radar last week. The bond market’s apparent disbelief in the continuation of fast monetary easing in the wake of stronger-than-expected economic data presented a strong headwind for equities. The improving consumer sentiment and robust durable goods numbers added to the rising yields.
This week will be crucial to the bond markets in either reestablishing or overturning the recent trend, which will in turn affect the stock market. Investors are focusing on the preliminary estimate of Q3 economic growth, as well as on the Fed’s preferred measure of inflation, Core PCE, and the latest data reflecting the state of the job market.
Indeed, job market numbers have been one of the main culprits for the steady rise in bond yields in the past month, as rosier than expected job growth has pointed to a stronger-than-expected economy, changing investor expectations for inflation and Fed policy. The latest two monthly job reports featured stronger-than-projected wage growth, adding to speculations that higher inflation rates may return.
Taking into account robust job and wage growth, the markets are currently pricing in zero chances of another jumbo cut in November, a 95% chance rates will fall 25 basis points, and a 5% chance they will remain on hold.
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This Week’s Quality Dividend Stock Idea
Enterprise Products Partners L.P. (EPD) is a leading North American provider of midstream energy services. EPD is primarily involved in the processing, storage, and transportation of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals. The company’s extensive network includes pipelines for natural gas, NGLs, crude oil, and refined products, along with associated storage facilities. Enterprise also operates natural gas processing plants and is a significant player in the export of natural gas liquids and crude oil, serving both domestic markets and international customers. Their services are critical in linking producers of natural resources to various market sectors, including industrial end-users, retail consumers, and energy traders.
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History of Midstream Leader
Enterprise Products Partners was founded in 1968 to capitalize on the growing demand for natural gas and NGLs in the Gulf Coast region. The company focused on building and expanding its pipeline infrastructure and storage facilities. EPD’s growth during this period was driven by increasing demand for natural gas and natural gas liquids (NGLs), strategic acquisitions of assets, and expansions that allowed it to leverage economies of scale and enhance its service offerings in key markets. This strategic groundwork helped to solidify its market position and financial stability, setting the stage for a successful public offering. Enterprise began publicly trading on the NYSE in 1998.
After going public, Enterprise Products continued to grow through a combination of strategic acquisitions and capital projects. It made several strategic acquisitions that significantly expanded its asset base and operational capabilities. Notable acquisitions included the merger with GulfTerra in 2002 and the purchase of TEPPCO Partners’ assets in 2005. These acquisitions not only expanded the company’s pipeline network but also added significant storage and processing facilities to its portfolio.
The company has continually invested in large-scale capital projects to expand and upgrade its network of pipelines, storage facilities, and processing plants. These projects have enabled Enterprise to increase its capacity to meet growing demand, particularly for exports of NGLs, crude oil, and petrochemicals. Enterprise has also grown by entering new markets and expanding its service offerings. This includes increasing its capabilities in the natural gas and crude oil export markets, which have become increasingly important as U.S. production has grown.
Over the years, EPD has heavily invested in technology to improve operational efficiency and environmental safety, which has enhanced its competitive edge. It has continuously worked towards a more integrated service model, offering everything from processing and transportation to storage and export, which allows them to control more of the supply chain and enhance profit margins. The resulting growth in revenues and distributions has helped reinforce investor confidence and provided capital for further expansion.
Today, with $71 billion in total assets, a market capitalization of over $63 billion, and annual revenues of nearly $50 billion, Enterprise Products Partners L.P. is a leading midstream energy service providers with a significant presence in the North American energy sector and beyond. The company ranks #303 on the Fortune 500 list of the largest United States corporations by total revenue.
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Vertically Integrated Model
Enterprise Products Partners operates a vertically integrated business model, centered around providing a full range of midstream energy services. These services include gathering and processing of natural gas, producing NGLs, and performing fractionation (separating NGLs into individual components used in different applications) via its own specialized plants.
EPD continues to invest in broadening its capabilities and reach. Thus, in August 2024 it announced the acquisition of Pinon Midstream, which specializes in natural gas gathering and treating services in the Delaware Basin, which spans New Mexico and Texas. The acquisition is strategic for Enterprise as it includes sizable assets (pipelines, stations, and other facilities) in an area with significant natural gas production.
Although primarily known for NGLs and crude, Enterprise also engages in activities related to natural gas, including potential liquefaction for liquified natural gas (LNG) export. The company has enhanced its capabilities in the LNG market, particularly through strategic infrastructure developments such as the expansion of the Acadian Natural Gas Pipeline System. EPD is leveraging its existing infrastructure to meet the growing demand for natural gas and LNG, which are seen as a bridge fuel from coal and oil to clean energy sources.
The company manages the transportation of natural gas, NGLs, crude oil, refined products, and petrochemicals across major production basins and consumption markets through a vast network of pipelines. These pipelines connect to major storage hubs, refining centers, and ports, which are strategic for domestic, as well as import and export activities. Notably, the company has also invested in marine terminals, which are crucial for the export of crude oil and NGLs.
In addition, EPD operates storage facilities for petrochemical products, which are essential for managing supply fluctuations and staging products for local usage or export, or processing after import. Enterprise facilitates the import and export of natural gas, NGLs, crude oil, and refined products through its array of integrated midstream infrastructure assets.
Enterprise also plays a role in the marketing and distribution of these products, ensuring that they reach domestic or international markets effectively. This includes securing contracts, managing logistics, and coordinating with local market demands and regulations.
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Stability and Faster Growth
Despite heavy investments in strategic acquisitions and capital projects, EPD maintains robust financial health. Its net debt-to-equity ratio of ~107% may seem high; however, it is moderate compared to peers in the midstream industry. In the midstream part of the Energy sector, where substantial capital is necessary for infrastructure development and maintenance, firms tend to leverage their operations to optimize asset utilization and expand their infrastructures.
The moderate level of leverage and the low risk of that leverage are confirmed by EPD’s high credit ratings at major global agencies. Its debt is rated “A-” at S&P and Fitch, and “Baa1” at Moody’s. Fitch recently affirmed its rating in September, praising its low business risk, “diverse stream of stable profits,” and high liquidity.
EPD’s leverage policy, in place since early 2023 and aimed at total debt reduction, coupled with its longstanding history of promptly delivering on its financial policies, serves as another factor behind the agencies’ view of the company’s debt as low risk. Besides, according to Fitch, Enterprise’s assets “fit well together in a value chain that has shown, year after year, an ability to capture value during volatile conditions.”
In addition to balance-sheet strength and high liquidity, Enterprise excels in terms of capital efficiency and profitability, with its ROE, ROA, and ROIC making the top 20% of the Oil & Gas industry. The company’s operating, EBITDA, net profit and FCF margin are considerably higher than the average for its industry.
EPD’s revenue has grown at a CAGR of 6.5% in the past decade, while its EPS CAGR was around 7.8%. In the past three years, the compound rates of growth have significantly quickened, reaching 19% for revenue and 14.6% for EPS. These figures underscore a strong upward trend in the company’s revenue generation capabilities during this period, supported by effective management and operational efficiency. The company’s next earnings report is scheduled for October 29th, with analysts forecasting a 12% YoY growth in adjusted EPS.
The steady growth in EPD’s revenue is expected to continue for years to come, supported by a high degree of inelastic demand for the provision of integral infrastructure services to producers and consumers of energy and energy products. The high visibility and predictability of revenue stemming from EPD’s reliance on long-term contracts with inflation provisions are stabilizing factors.
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High and Rising Dividends
Enterprise Products Partners is committed to responsibly returning capital to investors, i.e., raising shareholder compensation while continuing to reinvest in the business to create conditions for long-term growth. The company strives to produce attractive returns on capital while maintaining long-term financial flexibility and balance sheet strength.
Within this commitment, EPD has been paying and consistently increasing dividends each year since 1998. The 26-year track record of payout increases has earned it the title of a Dividend Aristocrat. This consistent payment history has been part of the company’s strategy to provide shareholder value through regular dividend payouts, contributing to its reputation as a reliable dividend-paying stock in the energy sector.
Since the commencement of dividend payments in 1998, the payouts grew at a CAGR of 9.5%. However, as EPD’s dividend yield reached very high levels versus both the total market and its generally high-yielding industry, rates of growth have slowed. Enterprise’s current dividend yield stands at 7.2%, almost double the average for the Energy sector. Despite the high yield, analysts forecast dividend growth of around 4-5% over the next several years.
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Total Return in Focus
In addition to dividends, EPD compensates its shareholders through opportunistic buybacks, which at times can be considered aggressive. In the third quarter of 2024, the company repurchased $76 million of its common stock, bringing the total buybacks performed in 2024 to $156 million.
Inclusive of these purchases, the company bought back $1.1 billion of shares under its current share repurchase authorization amounting to $2 billion. The ongoing buyback program was approved in January 2023 and has no expiration date, which allows the company the flexibility to buy back shares as needed based on market conditions and other financial considerations.
Enterprise’s shares have been under some pressure in the past year as the company slightly underwhelmed analyst EPS expectations due to heavy investment in infrastructure projects and acquisitions to create steppingstones for long-term growth. As a result, EPD stock has risen by just over 9% year-to-date, underperforming most of its comparable peers.
However, this underperformance has created attractive conditions for entry, specifically for long-term income investors. Enterprise is currently trading at a small discount to the Energy sector’s average valuations. In addition, EPD’s PE comes at the bottom of the price scale for comparable peers in the industry, leaving more room for additional appreciation. Moreover, based on its future cash flows, EPD appears to be undervalued by about 45%.
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Investing Takeaway
Enterprise Products Partners L.P. is a leading midstream energy player with a strong balance sheet and a diversified asset base, operating through a winning vertically integrated business model. The company’s investments in high-growth projects and steady demand for its services point to continued solid performance, supporting future dividend growth. EPD’s operational strength, solid management, and low valuation make it a low-risk investment with significant upside potential. Its high dividend yield, long and solid track record of payout increases, and commitment to shareholder value enhance its appeal to long-term income investors.
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Dividend Investor Portfolio
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Portfolio News
¤ This week will be busy with earnings reports from Portfolio companies. Edison International (EIX) will release its latest quarterly results on October 29th, while Automatic Data Processing (ADP) and Amgen (AMGN) are scheduled to report on October 30th. VICI Properties (VICI) will release its earnings on October 31st, and LyondellBasell (LYB) on November 1st.
¤ Philip Morris (PM) saw its stock climb after the tobacco company posted strong third-quarter results, surpassing analyst estimates for both revenue and earnings. Sales growth was led by a surge in demand for the company’s IQOS heated tobacco device and ZYN nicotine pouches. Looking ahead, management raised its full-year 2024 EPS guidance.
¤ Qualcomm (QCOM) came under pressure on reports that its long-term partner, Arm Holdings, was scrapping the license agreement between the two companies. The situation is developing into a serious legal dispute, which, if not solved, could roil the smartphone and PC markets. The two market leaders are headed to a trial to resolve the breach-of-contract claim by Arm and a countersuit by Qualcomm. QCOM is one of Arm’s largest customers; it uses Arm’s architectural infrastructure in making chips for Android phones, responsible for a large part of the company’s revenue. Citi analysts believe that the case will be resolved in court, ending in Qualcomm paying ARM a higher royalty. This would negatively impact margins in the short term, though the analysts view the potential hit as immaterial.
¤ BlackRock (BLK) is launching two new ETFs that give investors exposure to the artificial intelligence (AI) sector. The world’s largest asset manager said that the funds, iShares AI Innovation & Tech Active ETF and iShares Technology Opportunities Active ETF, have an objective to achieve strong returns by investing in companies that are focused on the semiconductors, software, and hardware that drive AI technologies..
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Recent Trades
None at the moment, although we are constantly evaluating stocks for a possible addition to the portfolio. Stay tuned.
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Portfolio Attributes
Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
3.94% | +9.55% | $4,606.96 |
Yield-on-Cost Adjusted, Weighted |
Average Analyst 12-Month Growth Outlook | 10K Per Stock at the Time of Purchase |
Current Portfolio
Name | EX-Dividend Date | Payment Date | Yield on Cost | Annual DPS |
Automatic Data Processing (ADP) | Dec 06, 2024 | Jan 01, 2025 | 2.24% | $5.60 |
Allianz SE ADR (ALIZY) | May 09, 2025 | May 28, 2025 | 5.67% | $1.49 |
Amgen (AMGN) | Nov 15, 2024 | Dec 06, 2024 | 3.09% | $9.00 |
BlackRock (BLK) | Dec 08, 2024 | Dec 23, 2024 | 2.56% | $20.40 |
Edison International (EIX) | Sep 27, 2024 | Oct 31, 2024 | 4.82% | $3.12 |
EOG Resources (EOG) | Oct 17, 2024 | Oct 31, 2024 | 3.95% | $3.64 |
JPMorgan Chase (JPM) | Oct 05, 2024 | Oct 31, 2024 | 2.86% | $5.00 |
Kroger (KR) | Nov 15, 2024 | Dec 01, 2024 | 2.82% | $1.28 |
LyondellBasell (LYB) | Nov 24, 2024 | Dec 04, 2024 | 5.27% | $5.36 |
Philip Morris (PM) | Dec 20, 2024 | Jan 10, 2025 | 6.06% | $5.40 |
Qualcomm (QCOM) | Nov 29, 2024 | Dec 13, 2024 | 2.25% | $3.40 |
VICI Properties (VICI) | Dec 20, 2024 | Jan 04, 2025 | 5.19% | $1.72 |
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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.