Time to Buy This Pipeline Stock?

EPD Stock Forecast: Pipeline management company Enterprise Products Partners (NYSE:EPD) is currently on many investors’ radars as a potential buy.

 

As a provider of midstream services for oil and natural gas companies, EPD is currently riding the wave of higher fuel prices.

 

The stock also stands out for its exceptionally high dividend yield at a time when investors are looking for cash flow to combat inflation. so, is EPD a buy? 

 

The simple answer to this question, at first glance, is that EPD offers an extremely high dividend yield.

 

The stock is a compelling option for investors looking to generate income from their portfolios. It currently yields 7.39 percent for an annual dividend of $1.90 per share. For reference, the overall yield of the benchmark S&P 500 index stood at just 1.69 percent in June.

 

EPD could also be a decent long-term bet on higher fuel prices.

 

While prices could cool a bit later this year, they are likely to remain elevated for the foreseeable future. As a pipeline operator, EPD is in an excellent position to take advantage of this trend and pass along its higher earnings to shareholders.

A final point that many investors are looking at when considering EPD is its ability to help them fight off inflation.

 

At over 7 percent, the company’s dividend yield is running only a bit below the most recent year-over-year inflation rates. As a result, EPD could help investors preserve their capital or supplement their incomes with higher cash flows from their portfolios.

 

Because most dividend companies don’t pay much more than 3-4%, EPD stands out as one of the few options that can put a serious dent in inflation that is nearing double-digit territory.

 

The first question investors must ask before buying EPD for its dividend is whether that dividend is safe and reliable.

 

At first glance, EPD’s payout may look too high to be sustainable. However, it’s worth noting that the company has increased its dividend a staggering 74 times since its 1998 IPO.

 

Over the last 10 years, the payout has grown at a compounded rate of 4.05 percent annually. So far, the steady pace of dividend increases has not put the company in peril, suggesting that the payout is relatively stable.

 

EPD’s dividend is also a bit below its historical average at the moment. Over the last five years, the company has maintained an average dividend payout ratio of nearly 100 percent.

 

Although extreme, this high dividend ratio does not appear to have seriously undermined the company. Today, the GAAP dividend payout ratio stands at 83.56 percent, a much safer and more sustainable level.

 

Despite being quite high, all signs suggest that EPD’s dividend is safe for the moment. Changes in market conditions could obviously change this outlook, but there does not appear to be any reason to doubt the dividend for the time being.

 

The most obvious and pressing risk to EPD is a faster-than-expected return to normal for fuel prices.

 

Oil fell below $90 a barrel in early August for the first time since the Russian invasion of Ukraine. These prices, however, are still quite high and give EPD plenty of room to generate earnings from the oil and gas companies it services.

A potential slowdown in the broader economy could also put some pressure on EPD. Lower fuel demand resulting from depressed economic activity may keep EPD from achieving its full potential.

 

However, as noted above, the company has successfully raised its dividend regularly since 1998. Clearly, the management team at EPD is able to ride out temporary demand fluctuations that arise from slowing economic growth or stagnant consumer spending.

 

Several factors point to the conclusion that EPD is a buy at the moment. First and foremost, the company is continuing to invest in new pipeline infrastructure that should keep it growing at a steady pace.

 

Recently, management announced that EPD would be purchasing Navitas Midstream, a Texas pipeline operator. This acquisition will immediately add about 1,750 miles of existing natural gas pipeline to EPD’s portfolio.

 

EPD is also continuing to produce strong earnings results, suggesting that the company is far from being out of steam. In the most recent quarter, EPD beat a consensus estimate of $0.63 per share with earnings of $0.64. For the same quarter in 2021, earnings were just $0.51.

 

Analyst estimates suggest that the company will generate $2.51 per share for the fiscal year, a 19.5 percent gain over last year.

 

In addition to its excellent dividend yield, EPD could offer a good deal of upside in terms of share price this year. The 12-month median price target for EPD based on 20 analyst forecasts is $31.50. This would represent a gain of 20.6 percent against the most recent price of $26.12.

 

Added to the stock’s dividend yield, this gain would allow EPD to deliver excellent returns for investors. If current analyst forecasts are correct, the stock could go on to double within the next five years.

Even more promising for share prices, EPD is also returning value to shareholders in the form of buybacks. In Q2, the company repurchased $35 million of its own shares. Ultimately, management plans to repurchase about $2 billion, nearly three-quarters of which is still to come.

 

EPD looks particularly attractive in terms of its valuation metrics. The stock trades at an estimated forward P/E ratio of just 10.34. EPD also trades at only about eight times its cash flow and two times its book value. 

 

Overall, EPD could be a strong buy option for investors looking for passive income in a low-yield environment. While the stock’s dividend is extremely high, there are no signs that it will be cut anytime soon.

 

Sustained high oil prices could also push EPD’s share price higher, giving investors a solid gain on top of their already impressive yield. Unless the safety of the dividend changes radically, EPD could be a good stock to buy and hold for the long run.

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