Last year was a big milestone for Enterprise Products Partners (EPD 0.30%). The master limited partnership (MLP) hit the quarter-century mark for annual distribution increases. That’s a phenomenal record for any company — and even more so for one that operates in the volatile energy industry.
Enterprise Products Partners wasted no time continuing its distribution growth streak in 2024, unveiling its latest raise this week. Given its financial strength and expansion project backlog, the MLP should have plenty of fuel to continue growing its payout in the future.
A well-supported level
Enterprise Products Partners recently declared its latest distribution. The MLP set its new quarterly rate at $0.515 per unit ($2.06 annualized). That’s 3% above the prior quarter’s rate and a 5.1% increase from the year-ago level.
The pipeline company can easily afford that higher rate, even though its distribution already has a high yield (7.4% before the increase). The MLP generates very stable and steadily growing cash flow, backed by long-term contracts and government-regulated rate structures.
Over the past year, it has produced about $8 billion in adjusted cash flow from operations. Enterprise Products Partners distributed 53% of that money to investors. It retained most of the remaining cash, which was more than enough to fund its capital projects (maintenance and growth).
Enterprise Products Partners’ strategy of using internally generated cash flow to fund expansion projects allowed it to maintain a strong balance sheet. The MLP has an elite credit rating (its A-/A3 bond rating is the highest in the midstream sector) thanks to its low leverage ratio. The company’s leverage was 3.0 times at the end of the third quarter, putting it in the middle of its 2.75-3.25 times target range.
Ample fuel to continue growing
Enterprise Products Partners should have no problem continuing to increase its payout in the future. The MLP’s large backlog of commercially secured expansion projects is a big factor driving that view. The company ended the third quarter with $6.8 billion of projects currently under construction. That’s an increase from $4.1 billion at the end of the second quarter after the company added $3.1 billion of new projects, more than offsetting the $400 million of projects it completed in the third quarter.
The company currently has projects scheduled to come online through the first half of 2026. That provides it with lots of visibility into future cash flow growth.
Meanwhile, it has several additional projects currently in development. The MLP anticipates it could invest up to $3.5 billion into expansion projects this year (it has already approved $3 billion in projects and sees the potential to spend up to an additional $500 million on those currently under development). That’s a potential increase from the $3 billion of expansions it funded last year.
On top of organic growth, Enterprise Products Partners can continue making acquisitions. While it didn’t make any deals last year, it has a long history of completing value-enhancing deals.
For example, in 2022, the company bought Navitas Midstream Partners for $3.2 billion and opportunistically purchased 580 miles of pipelines and related assets for $160 million. Those deals increased its cash flow, while Navitas supplied it with several new organic expansion projects it approved last year.
Given its low leverage ratio, Enterprise Products Partners has ample financial capacity to make additional acquisitions as opportunities arise. Future deals would likely enhance its cash flow and growth prospects, giving it more fuel to increase its distribution.
A high-yielding and steadily rising payout
Enterprise Products Partners pays a well-supported, high-yielding distribution that has steadily increased for years. That growth should continue, fueled by the company’s large expansion project backlog and elite financial profile. Those features make it an ideal income investment for the long haul.
Matthew DiLallo has positions in Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
