Why Enterprise Products Partners LP is a Solid Dividend Stock
Given the current economic climate, it is a perfect time to diversify in dividend yielding stocks. Stocks from the energy sector have seen a particular uptick since the start of 2019, yielding impressive returns for the average investor. As the population increases, natural gas will continue to be a source of energy that rises in prominence. With all relevant macro conditions, it is the perfect time to add natural gas companies into your portfolio. One of the best options currently on the table is Enterprise Products Partners LP (EPD), a natural gas company and oil company headquartered in Houston, Texas. This is a high-yielding dividend stock which provides buyers flexibility that they otherwise might not have noticed. With its widespread infrastructure and its increasing revenue stream, it’s hard not to take a look at EPD.
One of the main sources of revenue for EPD are its pipelines that span over 42,900 miles and carry natural gas, petrochemicals, and crude oil. One of the strategies that EPD has incorporated to drive revenues is the acquisition of smaller companies since its IPO in 1998. This has helped the company to continue to raise revenues while increasing its overall market share. EPD has since come to prominence as one of the dominant players in the space. The strategy of adding market share through acquisitions is profitable if the parent company is able to incorporate those businesses appropriately. This is one incidence where EPD has shown an advantage over its competition, utilizing acquired companies like GulfTerra to increase profits year after year. The wide breadth of the company’s personal portfolio is one of the reasons that this stock is a potential powerhouse.
There are several key indicators as to why EPD may be more lucrative than other stocks. Sporting a P/E ratio of just below 15, EPD has established itself as a consistent generator of profits since its IPO. The energy sector has seen continued growth over the decade, and it seems fair to assume that the trend will continue into the future. The primary macro risks that EPD faces are an increase in regulation that would likely accompany a Democratic administration or a breakthrough in another energy technology. Many events that could hamper the stock are longer-term concerns, which is why it is appropriate to evaluate the holding at set intervals. There are also other day-to-day risks that the stock faces, such as pipe explosions. However, the company has navigated similar situations well thus far, building experience for a crisis situation. This same experience will prove invaluable as the company continues to grow and expand.
One of the nice aspects of the stock is the dividend that is paid quarterly. In general, utility stocks like EPD enjoy more consistent revenues streams than comparable stocks in different sectors. This is because the government creates additional barriers to entry that are not present in other businesses. Projects, like laying down a new pipeline or installing an energy grid, are very hard to navigate through the various channels of state and local government. It is not surprising that getting any large physical structure built is a huge undertaking that relies on navigating the regulatory maze. However, this does work to the advantage of companies that have already established structures that would be hard to legally duplicate. As a result, utility stocks can offer higher dividends than most other market stocks. At its current price, EPD issues a dividend that is nearly 6%. This means that an investor receives approximately $6 annually for every $100 that they invest.
It is not hard to see how this growth could compound in a way that produces stellar returns. Using a quick estimate known as the rule of 72, it is possible to approximate how quickly an investor’s money would double if investing in EPD stock. The number (72) divided by the annual dividend yield (6) gives a total of (12). The full formula looks like this 72/6=12. This means that it would take approximately 12 years to double your money by investing in this stock (assuming that you reinvest dividends). This is not to mention the additional value that could be gleaned by having the stock go up in price. These are some of the most important considerations when investing in a stock like EPD or any other energy stock. Investments in high-yielding and profitable businesses like EPD are a way to compound investments in a consistent manner. However, there are additional growth figures that EPD offers that make it particularly intriguing.
One of the advantages that EPD possess is that the stock has consistently outperformed the consensus earnings per share (EPS) forecast. This means that analysts have consistently underestimated the earnings that the company would produce. This is typically a sign of capable management that makes good use of their resources. If a company is consistently overperforming this metric, then that bodes well for the long term viability of the company. Given all of the various problems that a company like Enterprise Products Partners LP can face, it seems like the management has done a stellar job to this point. The risks for utility stocks are much different in nature to the risks inherent in other kinds of business. Storms, snow, and technology failures could end up costing the shareholders substantial sums of money. This is why it is important to trust management. To this point, EPD has not done anything that is unacceptable. Given the history of the company and the brand that has been built, there is a good chance that management continues to impress into the future.
Overall, EPD is a good stock to have in your portfolio if you enjoy high dividends or utility stocks. It presents upside that is not inherent to many other stocks without the risk that typically comes with high dividend yields. If you are a believer that the energy needs of the country will only continue to grow, then it may not a bad idea to include utility stocks such as EPD as part of a well-diversified portfolio.