This "Boring" Pipeline Stock Has Never Cut Its Dividend. Here's the 1 Number I'd Watch.
Key Points
Enterprise Products Partners has raised its payout continuously for 29 years in a row.
A big reason for this is its conservative approach to distributing cash flow.
That said, investors should also keep an eye on Enterprise's distribution coverage ratio.
Enterprise Products Partners (NYSE: EPD) has raised its quarterly distributions for 29 consecutive years, never once reducing its payout. Despite midstream energy's steadiness relative to other segments of the energy sector, a track record of zero dividend cuts or suspensions is quite rare among pipeline stocks. Other large pipeline master limited partnerships (MLPs), including Plains All American Pipeline and Energy Transfer, have had to cut their distributions in the past.
A key reason for Enterprise's strong record is its approach to cash flow distribution. By taking a more cautious approach, this MLP's unitholders could continue to benefit from its payout consistency.
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Enterprise Products Partners and its well-covered dividend
In its quarterly earnings releases, Enterprise Products provides numerous financial metrics. One to pay particular attention to is the coverage of distributions ratio, which is distributable cash flow divided by distributions. Last quarter, this figure came in at 1.9x.
In other words, the MLP generated distributable cash flow nearly twice the size of distributions. With this high coverage, Enterprise is able to, on one hand, maintain and grow its nearly 5.75% dividend. At the same time, there's plenty of cash flow on hand to fund growth and expansion, reducing Enterprise Products Partners' need to borrow or issue additional MLP units.
Keeping an eye on this metric
Enterprise Products Partners is not for all investors. For those seeking stable gains, largely in the form of cash distributions, it's a solid opportunity. Keep in mind, however, that distribution growth has slowed down in recent years.
Moreover, if you do choose to buy Enterprise Product Partners, be sure to keep an eye on the coverage ratio. Each quarter, management presents this figure. If it starts to materially drop, it could be a sign that Enterprise is deviating from its historical approach, calling into question the sustainability of its future dividend growth.
Thomas Niel has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.