Top Picks 2020: Enterprise Product Partners (EPD)

01/17/2020 5:00 am EST

Focus: ENERGY

Tom Hutchinson

Editor, Cabot Dividend Investor

Despite the market riding at an all-time high, there is a sector of the market that is actually very cheap — energy stocks; the sector also happens to pay great dividends, and it might just be poised for a strong year in 2020. observes income expert Tom Hutchinson, editor of Cabot Dividend Investor.

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 (EPD) 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 on line 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.

nd 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 6.3% 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 dirt0cheap 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.

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