With a forward yield of 7.2%, Enterprise offers investors a highly attractive distribution. Here’s a look at its recent performance and whether now is a prime time to add this stock to your portfolio.
A Steady Performer with Reliable Cash Flow
Enterprise Products Partners has long focused on a fee-based business model, which provides stability and steady cash flow. In the recent quarter, this model again proved its worth, with Enterprise reporting a 5% increase in total gross operating profit, reaching $2.45 billion. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also rose 5%, totaling approximately $2.44 billion.
The company generated $1.96 billion in distributable cash flow (DCF) for Q3, up by 5% year-over-year. Adjusted free cash flow, on the other hand, was $943 million. Enterprise’s DCF, which factors in only maintenance capital expenditures (not growth capex), underscores the strength of its fee-based business model. Meanwhile, Enterprise’s balance sheet remains one of the strongest in the midstream sector, with a distribution coverage ratio of 1.7x and a leverage ratio of 3x.
Distribution Strength and Growth
Currently, Enterprise pays a quarterly distribution of $0.525 per share, up 5% from last year. As one of the few midstream companies with a 26-year streak of distribution increases, Enterprise is well-positioned to continue this trend. Investors can likely expect regular, incremental raises in the coming years, making it a compelling pick for income-focused portfolios.
Capitalizing on Growth Opportunities
Enterprise has significantly ramped up its growth project spending over the past year. After cutting back during the pandemic, the company expects to invest between $3.5 billion and $3.75 billion in growth projects this year, up from just $1.6 billion in 2022. Next year’s budget is set to increase further, with plans to spend between $3.5 billion and $4 billion, partially due to its recent acquisition of Pinon Midstream.
Enterprise currently has $6.9 billion worth of projects under development, many of which are expected to go online in the latter half of 2025 or 2026. Historically, the company has achieved a 12% return on invested capital, indicating that if it spends $4 billion on new projects, it could potentially add an estimated $480 million in gross operating profit annually.
Additionally, Enterprise is one of the few midstream companies positioned to benefit from rising demand for natural gas, driven by data center growth and artificial intelligence. While it hasn’t quantified the full potential of these opportunities, the company has noted a strong demand outlook for natural gas, particularly in the longer term.
Attractive Valuation Metrics
The enterprise-value-to-EBITDA (EV/EBITDA) multiple is a popular metric for valuing midstream companies, as it reflects the capital-intensive nature of building and maintaining pipelines and related infrastructure. Based on forward 2024 analyst estimates, Enterprise trades at a forward EV/EBITDA multiple of just 9.5, well below the pre-pandemic trading levels and significantly below the midstream industry’s historical average of 13.7x between 2011 and 2016.
With its growth plans firmly in place and a reliable distribution history, Enterprise Products Partners presents a compelling opportunity for income-focused investors. At a historically low valuation, it’s a rare chance to acquire a high-yielding midstream stock with strong growth prospects and a history of steady cash flow generation.