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Enterprise Products: Profitable Partners

06/26/2019 5:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

The U.S.-China trade war continues, slowing global economic growth. The Fed refused to reduce short-term interest rates, citing strong U.S. performance, explains Mark Skousen, growth and dividend expert and editor of Forecasts & Strategies.

But long-term rates continued to fall, which is bullish for stocks.  Our diversified group of growth and income stocks and funds continues to outperform the market this year.

All our investments are up so far in 2019, and nine stocks and funds are ahead by double-digit percentages. Enterprise Products Partners (EPD) — with a 6% yield — is ahead 21% this year.

There are three good reasons why Enterprise Products is outperforming the market and could rise another 20% this year.

First, growth is just as important as income. The midstream giant has $5 billion of expansion projects under construction.

Second, it pays a high, 6.1% annualized distribution without much risk. Not only has it increased its quarterly distribution for 59 straight quarters during the past 20 years, but it only distributes 60% of its cash flow to investors.

So, there’s plenty of cash to increase distributions in the future. The rest helps fund expansion plans. Moreover, Enterprise has secured long-term fee-based contracts that lock in 85% of anticipated earnings.

Third, the stock price is relatively cheap. Enterprise is selling for less than 11 times cash flow. Consequently, EPD recently announced plans to buy back $2 billion worth. Wall Street firm Stifel raised its target price to $34. That means EPD could rise another 20% this year. Keep buying!

Based in Houston, the partnership owns 49,200 miles of pipeline networks carrying oil, natural gas and petrochemicals. It allows refineries in the East to gain access to key North American shale plays. All along the way, it earns fee-based revenues that are constantly rising and are enough to pay a steadily increasing quarterly distribution.

After raising distributions over the past 20 years, the partnership is planning to hike payments by 2.3% through 2019. It also has announced a $2 billion buyback program to return more capital to investors. The business has invested $5 billion in growth capital projects, assuring high payouts in the future.

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