This Stock Wants to Give You More Money
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” – John D. Rockefeller.
The above quote by John D. Rockefeller is one of my favorites from the famous industrialist. Unfortunately for me the dividend payments I collect aren’t big enough to get too excited about. Still it is pretty exciting to get paid money you didn’t have to work hard to obtain. That’s why it’s downright thrilling to find out that a company wants to give you even more money.
You can imagine my excitement when I read that Enterprise Products (NYSE: EPD) management team was going to recommend to their board that their unit holders deserved a big raise. Not only were they recommending that the distribution be bumped up the next two quarters but they also suggested that special increase was in order. It works out to a six and a half percent increase over the same rate last year. That might not seem like a lot but it is likely more than double what your boss will likely offer you this year.
Enterprise is in the position to boost the payout thanks to more than $2 billion worth of growth capital projects being completed already this year with another $1.1 billion more in the pipeline to be completed later this year. They have a another $7.5 billion of additional projects under construction that’ll be completed over the next few years. As these projects come on line it’ll not only increase their distributable income but also free up some of the cash flow that they are currently redirecting towards these capital projects.
They have some great projects in their pipeline such as the ATEX Express that’ll take the abundant but stranded NGL, Ethane, from the Marcellus and Utica to the large and growing Gulf Coast Ethane market. Here they’ll provide companies like Dow Chemical (NYSE: DOW) and CP Chem which is a venture between Chevron (NYSE: CVX) and Phillips 66 (NYSE: PSX) with Ethane for their petrochemical plants.
Another great project they are building is a Propane Dehydrogenation Unit which will turn another NGL, propane, into polymer-grade propylene. In this project the unit they are building will compete with the likes of Dow Chemical and Phillips 66 though they won’t be a direct competitor as they will earn fees from the unit instead of operating it directly.
Chemical companies like Dow and the CP Chem venture of Chevron and Phillips 66 are all reliant on the feedstock that flow through Enterprise's pipe. As Enterprise builds out new pipes and plants that take advantage of our abundant energy resources it's providing these chemical companies with a durable competitive advantage to grow their business stateside. The ATEX Express alone will shave ten cents off the shipping costs of Marcellus and Utica ethane, providing an advantage to both the shipper and receiver by enhancing margins for both.
If there is one weakness in Enterprise’s value chain its their small position in the massive Marcellus and Utica region. They’re working on the ATEX pipeline as I mentioned and have the TE pipeline which transports propane into New York and Pennsylvania. They also have the ability to either reposition existing assets or build new ones to take advantage of these shale plays.
They don’t have quite the project pipeline as MarkWest (NYSE: MWE) has in the region. MarkWest just acquired $500 million worth of assets that they’re expanding and they have additional processing, fractionation and NGL transportation assets all under construction in the Marcellus while pursuing several projects in the Utica with a joint venture partner. It's a region that some say will require over $20 billion worth of midstream infrastructure over the next few years. What’s important for Enterprise is to continue their disciplined approach to development in the region.
It’s that disciplined approach that has enabled them to build or buy assets to consistently grow their distribution. They’ve grown it nearly every quarter since they went public while also staying disciplined in their distributions with a conservative coverage ratio of 1.3 times. That means that they have plenty of capacity to keep raising the distribution and if they keep developing great growth projects maybe someday we can sit back like Mr. Rockefeller bask in the dividend checks that are coming in.
latimerburned owns shares of Phillips 66 and Enterprise Products Partners L.P. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Chevron and 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.