This midstream energy company trades at a P/E ratio less than 13 and pays a high dividend yield of 6.29%, paid quarterly.
Enterprise Product Partners L.P. (EPD)
From Cabot Dividend Investor
Despite the market riding at an all-time high, there is a sector of the market that is actually very cheap, and that is energy stocks. The sector also happens to pay great dividends, and it might just be poised for a strong year in 2020.
U.S. energy production is absolutely booming. After a low point in 2007, technologies in hydraulic fracturing (fracking) and horizontal drilling uncovered previously irretrievable oil and gas deposits trapped in shale rock formations across the country. The discovery unleashed a tremendous energy boom. In just a few years, the U.S. has transformed into the world’s number one producer of both oil and natural gas.
You would think that with the energy revolution taking place American energy stocks would be through the roof. But they’re not. They’re actually cheap. The additional American supply on the world market combined with the global economic slowdown caused an oil price crash between 2014 and 2016. It wreaked havoc in the industry and most stocks have still not recovered. But, given the high prices of stocks and the voracious demand for yield, energy stock fortunes may be about to change.
Certain energy companies aren’t levered to volatile commodity prices but rather collect a fee for the storage and transportation of such. These midstream companies make money on the fact that there is a lot of oil and gas sloshing around the country, and business and future prospects have never been better.
Enterprise Product Partners is one of the largest midstream energy companies in the country with a vast portfolio of service assets connected to the heart of American energy production. It has $36 billion in annual revenues from an unparalleled reach in the industry with over 49,000 miles of oil and gas pipelines connected to every major US shale basin and 90% of American refiners east of the Rockies, and offers export facilities as well in the Gulf of Mexico.
There are several reasons why EPD is my favorite pick in the energy sector. As a big company, it has an advantage as it is much easier to get regulatory approval for expansions to existing facilities than new ones. The company also has great exposure to the fastest growing areas like liquid natural gas (LNG) and crude oil exports. In fact, Enterprise has over $9 billion in major projects under construction that will boost earnings, with billions coming online in the next year.
It also has a pristine balance sheet with debt at just 46% of assets and the highest credit rating in the midstream energy space.
Since the IPO in July of 1998, the stock has returned over 1800% compared to just 296% for the S&P 500 over the same period. And that’s despite the fact that the stock is selling 30% below the 2014 high. Yet over that five-year period, earnings have grown by an average of over 11% per year, and the stock is selling close to the lowest valuations in its history.
Then there’s the dividend. EPD currently yields a whopping 6%+ on a dividend that is rock solid. It’s solid because the company has an industry high 1.7 times distribution coverage. It has also raised the payout every year for more than twenty years in good times and bad. This is a dirt cheap stock with great value that should move higher at some point. In the meantime, you get over 6% to wait on a stock with limited downside.
Tom Hutchinson, Cabot Dividend Investor, www.cabotwealth.com, 978-745-5532, December 30, 2020