Looking for Dividends and Growth
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On most occasions investors need to choose between high dividend yields or exciting growth possibilities, because companies with the best growth prospects usually trade at below average dividend yields. But every rule has its exceptions, and I believe Boardwalk Pipeline Partners (NYSE: BWP) may perfectly well be one example.
Boardwalk is a master limited partnership, this kind of companies has the tax benefits of limited partnerships, but the liquidity advantages of listed stocks. Also, they are required to pay a high proportion of their income in dividends, which gives a high degree of visibility for dividend focused investors.
The company owns three interstate natural gas pipelines covering more than 14,000 miles of pipe between Texas and Ohio, and is also the owner 11 natural gas storage facilities. Pipelines have strong competitive advantages, its expensive and time consuming to build new pipelines, and there is not much economic rationality in building a new pipeline near an existing one. Regulatory hurdles are another source of protection for these companies against emerging competition.
Boardwalk gets nearly 80% of its revenues from firm capacity reservation charges under long term contracts which must be paid regardless of actual volumes. This gives Boardwalk higher stability in comparison to its peers, since its revenues don´t change too much with fluctuations in demand or natural disasters.
The following chart from the company´s investor's presentation shows the historical evolution of revenues from different sources compared with natural gas prices, as we can see, the company has not been affected much by market fluctuations.
The company has also been able to generate growing EBITDA over the years, which provides the fuel for increasing cash lows and dividend payments, and is a positive reflection about management´s ability to control costs and deliver profitability.
The company is very well positioned tom ship natural gas from emerging shale plays to end users across the Southeast; Midwest, and Northeast which gives it a very attractive platform for growth. Being a pure natural gas bet, Boardwalk is one clear beneficiary of abundant natural gas resources available at competitively low prices, which should increase usage of natural gas over the following years. Management expects important tailwinds from growing usage of natural gas.
Boardwalk yields a whopping 7.5% dividend yield, which is certainly attractive in a context of ultra low interest rates all over the world. Its stable track record and exposure to rising natural gas consumption make this company a very interesting bet.
There are other players in the sector which still offer juicy dividend yields and higher growth possibilities than Boardwalk, but they also have more exposure to fluctuating commodity prices which may affect their earnings and cash flows. This means higher potential for gains if energy prices recover some of their lost ground over the following months, but also more exposure to falling prices in a scenario of lackluster economic growth.
Enterprise Products Partners (NYSE: EPD) is the biggest company in the sector, paying a 4.8% dividend, and the company is also building a big propane dehydrogenation plant on the Gulf Coast to capitalize falling natural gas liquid prices. Enterprise also has the largest asset footprint in the Eagle Ford Shale in South Texas, and the company has recently announced new projects to increase its dominance in this region. Growth opportunities look quite strong in this case, but the company is sensitively more exposed to falling commodity prices than Boardwalk.
Big dividend yields and high growth opportunities don´t usually come together, but companies like Boardwalk are an interesting exception for that rule. Investors with a higher appetite for risk and a more tolerance for volatility may want to consider Enterprise Products as an alternative with superior growth prospects.
acardenal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.