Building My Dividend Portfolio - Enterprise Products Partners
Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This is part three of a ten-part series, which I will be publishing every week until the entire portfolio has been introduced. You can see Part One, where I discussed my first addition, Abbott Laboratories, and Part Two, where I discussed PartnerRe Limited.
I have been analyzing dividend companies for about six months. Now I am constructing a model portfolio of my own that I am presenting to the Motley Fool community, one company at a time, for ten weeks. I am digging deeper into individual companies that are at the top of my list.
I review the company on seven different criteria: yield, number of years paying and raising dividends, 5-year Dividend Growth Rate (DGR), 5-year projected Earnings Growth Rate (EGR), total return for the past twelve months, PE and payout ratio.
I constructed a rating system that awards points for each of the previous criteria. A “perfect” score would be 28 points, with 4 points awarded for all seven categories. The highest score that was realized by any company that I have examined so far is an 18, and it is awarded to Enterprise Products Partners (NYSE: EPD).
Enterprise Products Partners is a Master Limited Partnership in the natural gas business. The company operates NGL (natural gas liquids) pipelines, terminals, and storage facilities. Founded in 1968 and based in Houston, the Enterprise Product is classified in the Basic Materials sector and the Independent Oil and Gas industry.
In terms of its potential as a dividend-generating stock, I look at the current dividend metrics. Enterprise Products’ yield is 5.3% and it has a 15-year history of consistently paying and raising dividends. As an MLP, EPD pays out a large part of its income as distributions to the partners. These distributions are then subject to a very favorable tax treatment, which makes investments in these types of partnerships very attractive.
Specifically for MLP taxation purposes, there are two advantages that can benefit the investor. The first is that, as a partnership, the income is not subjected to corporate income taxes, which allows more of the income to be passed along to the partners.
Secondly, the distributions of an MLP are not considered income under the current tax code. They are considered a return of capital, and thus are not taxable to the receiver; they do, however, reduce the cost basis of the investment itself. Thus, when the investor finally sells, his cost basis will be reduced by the amount of distributions that he has received, so his taxable gain will be more. Therefore, you will only pay the tax on the distributions when you actually sell your position, and it will be considered capital gains.
You will still be assessed a share of the partnership's actual net income every year, but this tends to be significantly less than the amount of distributions, and is also reduced by the partnership's deductions for depreciation.
The last dividend increase from EPD was on November 18, with an increase of 2.4%. The dividend has been raised 4 times this year, for a total of 5.3% more paid out in 2012 than in 2011. Enterprise Products has managed to raise dividends every quarter for 33 quarters, which includes the volatile years of 2008 and 2009, during the fiscal crisis.
The company’s 5-year DGR is 14.6%, which exceeds my threshold of 7.0%. The earnings growth rate as estimated by the 23 analysts who cover the company is 8.2%, as compared to the growth rate for the industry of 13.7% and for the sector of 12.7%. (The S&P 500 5-year EGR is currently 9.1%).
EPD’s earnings estimate for FY 2012 (reported January, 2013) is $2.61, compared to last year’s actual $2.38, an increase of 10%.
The company has a TTM PE of 17.5, based on today’s price of approximately $50. This PE is lower than the industry PE of 21.8 and the sector PE of 18.8.
Enterprise Products is currently trading at about 10% less than its 52-week high of $55.38, reached in October, and up 11% from its low of a year ago. Its twelve month total return is 15.5%.
The Motley Fool community rates EPD a five-star CAPS pick, with 1300 Bulls and 24 Bears. The 20 professional analysts who cover the stock rank it a 1.6 (1.0 = Strong Buy, 5.0 = Sell) with 10 Strong Buys, 10 Buys, and 3 Holds. They have assigned aone-year average target price of $59.25, which is a potential gain of 19%.
I looked at another dividend-payer in the MLP field, Kinder Morgan Energy Partners (NYSE: KMP). I know that KMP is an extremely popular stock for dividend portfolios, but here’s how it lines up according to my criteria: It yields 6.4%, has been paying and raising dividends for 16 years. Its DGR is 4.0%, its EGR is 12.8%, and its twelve-month Total Return is 4.0%. In my scoring system, it scored a 10, which is not enough to get it into my portfolio.
Kinder Morgan is a stable and reliable company, and its dividend yield is attractive, but it does not have the recent growth that I like to see, and despite its consistent dividend raises, it does not have an aggressive-enough DGR for my taste. There are other companies that do better.
I also looked at a direct competitor of Enterprise Products, another MLP, Plains All American Pipeline (NYSE: PAA). Here’s how it lines up according to my criteria: It yields 4.8%, and has been paying and raising dividends for 12 years. Its DGR is 13.1%, its EGR is 6.1%, and its twelve-month Total Return 38.2%. In my scoring system, it scored a 17, which is enough to have it considered further for my portfolio, which I will definitely do.
Enterprise Products has many strengths, with strong analyst support, excellent historical dividend growth, a very attractive yield, and reasonable PE. It is now the third stock in my new dividend portfolio.
I will begin tracking it based on the closing price on the day that this article is syndicated.
khern0203 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!