This 10% Yielding Blue-Chip Is Expected To Outperform the S&P 500 By 255% Over The Next 5 Years

This 10% Yielding Blue-Chip Is Expected To Outperform the S&P 500 By 255% Over The Next 5 Years

Posted On July 7, 2020 4:12 am

Enterprise Products Partners is, simply put, the safest 10% yielding blue-chip on Wall Street today.

Bullish Thesis

While many other midstream operators are playing checkers, Enterprise Products Partners is a chess master. It is the pre-eminent midstream infrastructure company, vertically integrated with best-in-class assets at nearly every point in the midstream value chain.

It can aggregate supply of every type of hydrocarbon from multiple sources in major producing basins (Permian, Eagle Ford, DJ, Piceance, Green River) and deliver it to multiple end markets (refiners, petrochemicals, exports). These assets are the linchpins for both shippers and end users.

Liquidity has improved since Enterprise’s mid-March update, as it signed an incremental $1 billion 364-day credit facility, bringing total liquidity to $8 billion.

Enterprise now has sizable reserves, given our estimated $1.2 billion in excess cash generation (operating cash flow minus capital spending minus distributions) over 2020-21 and $8 billion in liquidity versus $2.3 billion in upcoming maturities.

Seventy-eight percent of its customers are investment-grade. In short, Enterprise’s ability to support its distribution, despite market concerns, remains rock solid…

Enterprise provided further insight into its fee-based earnings, which are typically 80%-90% of earnings. Take-or-pay commitments make up 45%-55%, more resilient areas such as storage and demand-driven pipeline exposure make up about 20%-30%, and volume-exposed fees make up the balance.

These numbers are higher than we expected and likely reflect its natural gas exposure where take-or-pay contracts are more common, plus 90%-95% its export contracts (oil, ethylene, liquefied petroleum gas) are take-or-pay. ” – Morningstar

Enterprise has the strongest balance sheet in the industry, and according to over 60 analyst research reports/notes and credit rating updates, barring a complete collapse of the US energy industry, its 10% yielding payout will remain safe during the worst oil crash in history.

To sum up:

  • 10.1% safe yield vs 1.9% S&P 500 (and 2% to 2.5% most dividend growth ETFs)
  • 2.1% CAGR long-term growth consensus vs 6.4% for the S&P 500 and 5% to 7% most dividend growth ETFs
  • 48% undervaluation vs 24% to 50% overvaluation for S&P 500

Risks To Consider

The single greatest risk to the Enterprise story is failure of demand for natural gas liquids from the petrochemical industry in the Gulf of Mexico to materialize. In addition to making up over 50% of the partnership’s gross operating margin today, Enterprise’s NGL business will serve as its primary growth engine through the rest of the decade. We anticipate demand for ethane due to ethylene crackers under construction in the Gulf in the next few years.

However, much of this demand is out of Enterprise’s control. Any delays or reduced demand would have a materially negative effect on Enterprise’s earnings. Even as much of the downside risk is mitigated by sufficiently contracted capacity, failure of NGL demand to materialize would cap Enterprise’s earnings upside.

Enterprise holds some commodity price risk from both volumes and equity ownership of natural gas, crude oil, and NGLs. The partnership addresses some of this risk through hedges and its diversified asset base. We maintain that management’s efforts to vertically integrate insulates the business, proving natural hedges against much of the commodity price volatility. However, the main risk to Enterprise’s marketing business is a narrowing of spreads.

As with many yield-oriented investments, Enterprise is also exposed to interest-rate risk. If interest rates increase faster than expected, Enterprise units could underperform, as a steepening yield curve increases expected distribution yield for competing assets.” – Morningstar

Valuation/Total Return Profile

  • 2020 average historic fair value: $34
  • current price: $17.62
  • discount: 48%
  • potential good buy price: $32
  • Dividend Kings rating: potentially ultra-value buy

EPD 2025 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

If EPD grows as expected and returns to the mid-range of historical MLP bear market fair value (12 times operating cash flow) then investors could see almost over 150% total returns over the next 5 years.

EPD 2022 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

If EPD grows as expected (slightly negative during the oil crisis) then merely returning to historical MLP bear market fair value could double your investment over the next 2.5 years.

How accurate are analysts at forecasting EPD’s growth?

EPD tends to beat expectations in most years, and by high double-digit margins.

Now compare this incredible safe yield and return potential against the low-yielding and highly overvalued S&P 500.

                               S&P 500 Valuation Matrix 

Year EPS Consensus YOY Growth Forward PE Blended PE Overvaluation (Forward PE) Overvaluation (Blended PE)
2020 $124.81 -23% 25.5 22.2 56% 31%
2021 $163.32 30% 19.5 22.5 19% 32%
2022 $187.06 13% 17.0 18.2 4% 7%

(Source: Brian Gilmartin, Reuters’/Refinitiv, F.A.S.T Graphs, FactSet Research)

                            S&P 500 Total Return  Potential Matrix 

Year Upside Potential By End of That Year Consensus CAGR Return Potential By End of That Year Probability-Weighted Return (CAGR)
2020 -32.4% -55.2% -41.8%
2021 -10.8% -7.4% -5.6%
2022 4.5% 1.8% 1.4%
2025 32.6% 5.3% 4.0%

(Source: Brian Gilmartin, Reuters’/Refinitiv, F.A.S.T Graphs, FactSet Research)

S&P 500 2022 Consensus Return Potential 

(Source: F.A.S.T Graphs, FactSet Research)

If the market returns to historical fair value and earnings grow as expected, then 4.5% total returns could be expected…over the next 2.5 years. Even a V-shaped recovery wouldn’t justify the highest valuations in 19 years.

S&P 500 2025 Consensus Return Potential 

(Source: F.A.S.T Graphs, FactSet Research)

The broader market, if earnings grow as expected and valuations return to modern-age historical norms, could be expected to deliver just 33% returns…over the next five years.

That’s 5.3% CAGR, far below the market’s historical 5% to 7% CAGR.

EPD could deliver the same kind of annual returns as the S&P 500 is expected to deliver over the next five years in total…every year through the end of 2022.

Over the next five years, EPD’s probability-weighted expected returns are 255% superior to the market’s. Safe distributions alone are likely to double the market’s returns.

Putting It All Together: Why EPD Is A Potentially Great High-Yield Investment Right Now

I base all my investing decisions based on the three priorities of long-term income investing.

To those three we add valuation since over 10+ year periods fundamentals and valuation mean reversion drive 90% to 91% of total returns.


EPD Decision Matrix 

Goal EPD Why Score
Valuation Potential Anti-Bubble/Ultra-Value Buy 48% undervalued 4/4
Preservation Of Capital Above-Average BBB+ stable outlook credit rating, 5% long-term bankruptcy risk 6/7
Return Of Capital Exceptional 53.3% of capital returned over the next 5 year via dividends vs 11.1% S&P 500 10/10
Return On Capital Exceptional 14.2% PWR vs 4.0% S&P 500 10/10
Relative Investment Score 97%
Letter Grade A (excellent)
S&P 73% = C (market-average)

From the perspective of conservative income investors, EPD represents a potentially excellent long-term dividend growth stock with

  • 382% better 5-year dividend return potential
  • 255% better 5-year annualized probability-weighted expected returns

It remains the best safe ultra-yield option on Wall Street.

About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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