Enterprise Products: Patience in Pipelines

03/08/2016 8:00 am EST

Focus: ETFs

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

There are plenty of scaremongers who are predicting a repeat of 2008 due to the boom-bust cycle in oil. Could it happen again? Asks Mark Skousen, editor of Forecasts & Strategies.

This time around, the fracking technology revolution and the Fed’s zero-interest-rate policy led to an excessive boom-bust cycle in oil.

None have been immune, including the “safe” pipeline companies such as Enterprise Products Partners (EPD).

This stock has tried our patience, but we’ve decided to stick with it. Fortunately, EPD has enough cash flow to keep increasing its dividend.

It recently announced another increase, to 39 cents per share. That’s the 45th increase in a row. It also announced plans to repurchase up to $200 million worth of stock in 2016.

There are several reasons why Enterprise Products should remain fundamentally strong even if the stock price shows weakness.

First, its cash flow is largely supported by fee-based assets; it has $6 billion of new projects that begin operations in 2016 and will drive cash-flow growth.

Enterprise Products also boasts an investment-grade credit rating, has more than enough cash flow to pay an increasing distribution and uses retained cash flow to reduce debt.

Finally, it will benefit especially from the US government’s new policy that allows the export crude in 2016 after a 40-year ban.

Last month, Randa Duncan Williams (daughter of EPD founder) bought 3,830,256 shares, or about $100 million worth of stock, at $26.11 per share. That’s a strong vote of confidence.

Patience will pay off with this energy play. But note: Due to its volatility, I recommend you limit your position in Enterprise Products to under 5% of your portfolio.

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