A Pipeline to Profits

Enterprise Product Partners is a master limited partnership (MLP) whose units (like shares of corporations) trade on the NYSE. MLPs pay extremely low tax rates as they are required to pass most annual profits directly to their unit holders, who are then responsible for any taxes due. MLPs generate K-1 forms for tax filings which can be a bit of a nuisance. Tucking modest amounts of MLP units into tax-sheltered accounts can eliminate this problem. Just be sure to collect less than $1,000 per year from MLP distributions within those accounts. EPD is among America's largest natural gas and natural gas liquids (NGLs) handlers, storers and transporters. 2017 revenues were estimated at about $27 billion. Think of companies like EPD as toll takers that make money in proportion to the overall volume of natural gas and NGLs transported and stored each year. Higher petroleum prices and increased production volumes will generally lead to improved profits for EPD. Despite crude oil's 2014 price collapse, EPD managed to post decent 10-year growth across all major metrics. Continuous unit-holders from Feb. 10, 2008 through that same date in 2018 earned 106.7% total returns. At last week's closing quote of $25.98, EPD offered an estimated forward yield of 6.66% making it a good choice for income-oriented investors. Over the past eight years EPD averaged about 21.2x current year's EPS along with a typical yield of 5.34%. As of Feb. 10, 2018, its forward P/E was discounted, at just 17.1x. EPD's dividend rate was more than 24% better than its historical average. Those numbers look similar to what EPD sported at its three previous best buying opportunities (green-starred below). Enterprise Product Partners obvious should have sold moments (red-starred) reflected the opposite. EPD's P/E ratios were higher than normal in all three instances. A simple regression to the mean valuation, based on 21.2x this year's estimate supports a 12-month target price north of $33. Reverse engineering the expected cash distribution rate for 2018 to a normalized 5.34% level would make for a $32.39 one year goal. Both those figures appear well within reach. EPD topped out at levels ranging from $29.40 to $41.40 during each of the six calendar years 2013 right through 2018 YTD. Don't just take my opinion on this. Independent research from Morningstar rates EPD as a 4-star (out of 5) buy. They peg present-day fair value as $30 while noting EPD's wide moat and exemplary management team. Standard & Poors research came to similar conclusion regarding EPD. Its Feb. 2, 2018 evaluation, with the units at $27.09, called them a BUY. S&P's 12-month price target dovetails nicely with my own, at $32. Keep in mind, with an almost 7% dividend stream, reaching $32 would provide about 30% in total return if achieved in a 12-month time horizon. Option writers can get paid tempting premiums for selling Jan. 17, 2020 expiration date puts on EPD. Worst-case, forced purchase prices on the $25, $27 or $30 strike prices dropped the if exercised numbers to just $21.56 to $23.20. EPD could fall by another 10% to 17% without causing losses on those commitments. Future oil prices and stock market fluctuations can never be guaranteed. We can know for sure, though, that owning EPD at $22.05 or lower, would have been a winning position more than 95% of the time during the previous half-decade. Enterprise Product Partners is a top choice for income and/or total return investors willing to put up with the hassles involved in MLP investing. Buy some EPD units, sell some long-term puts or consider doing both.

A Pipeline to Profits

Enterprise Product Partners is a master limited partnership play at an attractive valuation.

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