Enterprise Products Partners (EPD) has a knack for increasing its cash-distribution payments to investors. The master limited partnership (MLP) has given its investors a raise twice already this year and boosted its payout by 5% over the last 12 months. That continues its long history of dividend growth. This year marks its 26th consecutive year of distribution increases.

The MLP has ample fuel to continue increasing its distribution, which currently yields over 7%. That makes it an excellent option for those seeking a lucrative and steadily rising passive income stream.

Continuing the streak
Enterprise Products Partners recently paid its latest-quarterly distribution of $0.525 per unit ($2.10 annualized). That was about 2% above the prior-quarter’s level and 5% higher than the year-ago rate. The MLP has now increased its payout every year since its initial public offering (IPO) 26 years ago.

Several factors have contributed to the company’s ability to deliver such consistent growth. For starters, the midstream company generates very stable cash flow. It has a diversified portfolio of midstream assets, including pipelines, processing plants, storage terminals, export complexes, and petrochemical plants. Most of its assets produce fee-based cash flows backed by long-term contracts or government-regulated rate structures.

Meanwhile, the company pays out a conservative percentage of its stable cash flows. Over the last 12 months, Enterprise Products Partners has produced $8.4 billion of adjusted cash flow from operations and distributed $4.4 billion to investors. That puts its payout ratio at around 52% of its cash flow, which is conservative for a midstream company. It allows the MLP to retain billions of dollars in cash flow to fund expansion projects, repurchase units, and maintain a strong balance sheet.

Speaking of its balance sheet, Enterprise Products Partners has one of the best in the midstream sector. The MLP has A-rated credit and a low 3.0 times leverage ratio. Because of that, it can borrow money at lower rates and better terms to fund its operations and expansion. For example, the company recently priced $1.1 billion of 10-year notes at a 4.95% rate and $1.4 billion of 30-year notes at a 5.55% rate, allowing it to refinance maturing debt and fund expansion projects.

Lots of visible growth coming down the pipeline
Enterprise Products Partners should have no problem continuing to grow its distribution payments in the future. Fueling that view is its large backlog of expansion projects. The MLP currently has $6.7 billion of major capital projects under construction that should come online through 2026. These projects include additional processing plants, pipeline expansions, and export capacity. The company’s commercially secured projects give it a lot of visibility into its future cash-flow growth and its ability to return more cash to investors.

The company continues to find new growth opportunities. For example, it recently announced plans to move forward with a key expansion project along the Houston Ship Channel. The project will increase its propane and butane export capacity by 300,000 barrels per day when it enters service at the end of 2026. The MLP has several other projects under development, including its Sea Port Oil Terminal, that could fuel growth beyond 2026.

Acquisitions are another big driver of distribution growth for Enterprise. The company has a long history of making accretive deals, from large-scale corporate mergers to asset acquisitions. For example, it acquired interests in two joint ventures from its partner Western Midstream Partners earlier this year for $375 million. It now owns 100% of Whitehorn Pipeline Company and EF78. It also bought that MLP’s stake in the Panola Pipeline for $25 million, boosting its stake to 70%. Given its elite balance sheet, Enterprise Products Partners has ample financial flexibility to continue making acquisitions as attractive opportunities arise.

A premier passive income producer
Enterprise Products Partners continues to increase its lucrative distribution. That trend should continue. The company has one of the strongest financial profiles in the midstream sector and plenty of growth coming down the pipeline. Because of that, it’s a great option for those seeking an attractive and steadily rising income stream (and understand the tax implications of investing in MLPs, including that they send a Schedule K-1 Federal Tax Form each year).

— Matt DiLallo

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Source: The Motley Fool