Is Enterprise Products Partners Stock a Buy?
Enterprise Products Partners (NYSE: EPD) is an intriguing stock for income-focused investors. The energy partnership has grown its distribution payment to investors every year for 25 consecutive years, and it currently yields an attractive 7.2%.
The stock could be a good source of income for your portfolio -- but before you buy, you might want to consider a few things.
Enterprise Products Partners helps move energy throughout the U.S.
Enterprise Products Partners operates over 50,000 miles of pipelines to move stuff like natural gas, oil, and chemicals across the United States. As a midstream company, Enterprise owns and operates pipelines in key production basins, connecting them with major refining centers and export terminals throughout the U.S.
Upstream oil and gas companies that explore and drill for oil tend to be susceptible to price swings in the commodities they extract. As a midstream operator, Enterprise is less vulnerable to market price fluctuations for oil and natural gas. It primarily benefits when the demand for oil and gas rises, which increases demand for its pipelines, but its pipelines are generally always in operation at some minimum level, so revenue is always being generated.
Enterprise's cash flow tends to be stable thanks to long-term, fixed-fee contracts with upstream companies that provide investors visibility into its expected future cash flows. These stable cash flows enable the company to pay its unitholders a stable, growing dividend.
Image source: Getty Images.
Enterprise is less vulnerable to swings in oil and gas prices, but investors will want to consider a few other factors. For one, although there is a strong push to reduce the use of carbon-producing fuels like oil, near-term trends suggest that oil and gas usage will not decrease soon.
Populations worldwide continue to grow, and the amount of energy used to power data centers, artificial intelligence, and cryptocurrency will also continue to grow. According to a report by Goldman Sachs, data center power demand will grow by 15%, compounded annually, and overall U.S. energy demand will grow by up to 2.4% annually (compared to 0% on average in the decade prior), with natural gas providing about 60% of this energy.
Changes in demand for U.S. oil and gas also impact Enterprise's earnings potential. The shale oil and natural gas boom and rising geopolitical uncertainty have spurred the U.S. to ramp up its oil and gas production to be a leading energy provider worldwide. According to data from the U.S. Energy Information Administration, since 2006 U.S. natural gas production has more than doubled from 19 million cubic feet to 41 million cubic feet, and increased energy needs should be a tailwind for future growth.
Investing in Enterprise Production Partners has tax consequences to consider
Enterprise operates as a Master Limited Partnership (MLP), and IRS rules require these partnerships to earn 90% of their income from qualifying sources, including the exploration, production, and transportation of natural resources. This tax treatment, coupled with Enterprise's stable revenue from long-term, fixed-fee contracts, is why the company pays such an attractive dividend yield. However, there are also tax implications that you'll want to consider.
If you own shares (units) in an MLP, you will get a Schedule K-1 Form come tax time, providing you with your share of income, gains, losses, deductions, and credits. These forms tend to go out later in tax season, and investors usually have to wait to file their taxes.
MLPs have significant depreciation expenses and other tax deductions, so a portion of the distribution (around 10% to 20%, which can vary depending on different factors) is considered taxable income. The remainder of the distribution is seen as a return of capital and reduces your cost basis in the MLP. As a result, a significant portion of taxes on those distributions is deferred until you sell your units in the MLP, which can make things more difficult come tax season.
Is it a buy?
Enterprise Production Partners isn't going to be a rapidly growing company. Instead, it operates a stable business with steady cash flows, thanks to the long-term, fixed-fee contracts that help it weather even the industry's most challenging times.
EPD Dividend data by YCharts
Last year the company distributed about half of its free cash flow to investors, with the remainder used for expansion projects and unit repurchases. As of April 30, Enterprise had $6.9 billion in approved projects under construction, which should fuel its growing distribution payment.
Enterprise Production Partners' 25-year history of growing its distribution shows the stability of the business. With more growth in the pipeline, it's an excellent stock for income-focused investors to scoop up today.
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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
