A 7% Yield Plus Major Upside Potential? Yes Indeed

It takes a crisis to see values like this. Master limited partnership (MLP) Enterprise Products Partners Ltd. now offers extreme potential accompanied by a tremendous quarterly payout. EPD is an integrated provider of natural gas, and natural gas liquids in both the United States and Canada. The company is closing out an all-time record earnings year this month and is expecting to see even better results in 2019. Its annual distribution rate has never been higher. In short, there is no bad news on this very fine operator. In fact, EPD's management garners Morningstar Research's rarely awarded exemplary rating. You'd think that a great business, with a market-beating dividend yield of over 7%, would be selling for a high valuation. Instead, in this crazy environment, EPD is now available at one of its cheapest levels of the past decade. As of Dec. 27, 2018, the shares were selling for just 13x trailing earnings per share and around 12x next year's projected EPS. That's a huge discount to its 2010 through 2017 average P/E multiple of 21.2x. EPD's yield now sits at almost 26% above its historically normal 5.33% level. Four of the most recent five best buying opportunites (green-starred below) in EPD launched from valuations higher than today's. The other instance materialized earlier in 2018, and saw EPD climb rapidly from $23.60 back up to $30. EPD's only two obvious should have sold moments (red-starrred) represented clearly overpriced periods when multiples were far above normal. A simple regression-to-the-mean on EPD's forward estimate justifies a 13-month target price north of $41. That goal is not farfetched. EPD broke $41 back in 2014, and $37 in 2015, when EPS and dividends were well below their present-day numbers. EPD has touched or exceeded $30 during each calendar year since 2013, including 2018. All major business metrics are primed to continue growing over the coming three to five years. Independent research house Morningstar not only loves the management team, it includes EPD on their 5-star stock list of only their most undervalued names. The list of positive attributes is long. EPD trades near a 52-week low. It sports a terrific yield and has a wide business moat. Upside is clearly defined and very substantial. Valuation is near historical lows. EPD appears to be the total package. Value Line's three to five-year projections for EPD (shown below) were made when the shares were still at $26.88. The already tempting return figures are much better now, from a more heavily discounted entry point. Option writers can lock in even lower break-even points by shorting Jan. 15, 2021 expiration date puts at strikes of $25, $27, or $30. That technique provides extra margins of safety on the downside while still allowing for substantial gains if EPD rises as expected. Future stock market action can never be guaranteed. We can know for sure, though, that EPD has not changed hands for less than $23 since the first half of 2016. The only negative related to EPD is its MLP structure. MLPs generate K-1 forms which add some complication to your tax returns if the shares are held in taxable accounts. Total return potential like what is available on EPD right now, though, should more than justify the extra hassles. Buy some EPD, sell some puts, or consider doing both.

A 7% Yield Plus Major Upside Potential? Yes Indeed

This MLP appears to be the total package.

Columnist Conversation

Implied Volatility on Crude Exploding

Ulcer Index

The Market Doesn't Believe Musk

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.