Enterprise Keeps Defying Outside MLP Gravity with Yet Another Distribution Hike

July 7, 2016 by Jon C. Ogg

It was not that long ago that investors were getting ever more comfortable with the master limited partnership (MLP) segment in energy and infrastructure. Most investors believed, or hoped, that the MLPs were free from the whims of the price of oil. That proved to be wrong due to the severity of the oil price swing. If there are a few top MLPs with solid management and a track record of managing through hard times, Enterprise Products Partners L.P. (NYSE: EPD) would certainly be among the top picks.

Enterprise is the king of MLPs by size ($60 billion market cap), even if 2015 revenue dropped from 2014 and even if revenues are expected to remain muted in 2016 and 2017. And to show just how well Enterprise is running itself, the outfit just announced that the board of directors of its general partner declared an increase in the quarterly cash distribution paid to partners.

What current and prospective investors need to consider here is that this is yet another hike. It may even come as a surprise to many investors considering that many MLPs have had to go on hike-hiatus, cut their distributions or have even eliminated their distributions entirely due to their finances.

Enterprise will pay out $0.40 per common unit as its distribution, for an annualized run rate of $1.60 per unit. Again, the MLP keeps raising its distribution despite the problems with peers. Enterprise said:

This distribution rate with respect to the second quarter of 2016 is consistent with the distribution that Enterprise’s management planned to recommend to the board of Enterprise’s general partner as indicated in the press release dated January 4, 2016… This distribution, which represents a 5.3 percent increase over the distribution declared with respect to the second quarter of 2015, is the 57th distribution increase since Enterprise’s initial public offering in 1998 and the 48th consecutive quarterly increase.

24/7 Wall St. reviewed the quarterly distribution history going back to its 2015 unit-split on a two-to-one basis. This distribution hike history is as follows:

  • Apr. 27, 2016, $0.395 distribution
  • Jan. 27, 2016, $0.39 distribution
  • Oct. 28, 2015, $0.385 distribution
  • Jul. 29, 2015, $0.38 distribution
  • Apr. 28, 2015, $0.375 distribution
  • Jan. 28, 2015, $0.37 distribution
  • Oct. 29, 2014, $0.365 distribution
  • Aug. 22, 2014, split

What matters is what this $1.60 annualized distribution means. As with other MLPs, a large portion of the distribution is considered a return of capital. That aspect of distributions is not taxed due to its tax structure, although the income portion is.

Distributions are considered dividends by many investors. However, they should be considered more of a yield equivalent rather than a true yield. Still, that new $1.60 annualized distribution rate would be a yield equivalent of right at 5.5%. With a $60 billion market cap, that has Enterprise paying out the equivalent of nearly $3.3 billion on an annualized basis to its unit holders.

As a final reminder, Enterprise is the top or one of the top MLP holdings in many closed-end mutual funds and is generally the top holding, or in the top, of almost every top exchange traded fund (ETF) tracking the MLP segment. It is also ranked highly among funds and ETFs tracking the infrastructure segment.

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The reaction in Enterprise’s units was up slightly, by $0.24 to $29.11 on Thursday morning right after the news broke. Its consensus analyst price target is $32.58, and its 52-week trading range is $19.00 to $31.17. Just keep in mind that Enterprise’s units traded at $40.00 very briefly in 2014 before the oil price decline turned into an oil price implosion.