In an earlier post I discussed the big boy of the MLP space, Kinder Morgan. Today, I’ll talk about the new big boy in the MLP space, Enterprise Products Partners (EPD). EPD is now the largest MLP by market cap. Like KMP, EPD’s historical performance as an investment is downright impressive. For the last 10years it has returned 20.1% CAGR along with a distribution growth rate of 8% CAGR. And like KMP it has grown distributions every year since going public including during the tech crash of 2000, the 2003 recession, and the 2008 financial crisis. The chart below shows its historical performance vs the Alerian MLP index (gray), and the SP500 (red).
Like KMP, a truly incredible performance during the ‘lost decade for stocks’.
What about the future? This is what I think sets EPD apart from its peers. First, from the get go, EPD capped the GP IDR splits at 25% when the industry norm was 50%. This was a visionary move by their late founder Dan Duncan and has served their share holders well. Second, EPD announced they were buying out their general partner EPE. As I discussed in the KMP post, this is a new trend in the MLP space. The merger is expected to close by the end of 2010. So, starting in 2011, EPD will have no IDR splits to dilute the cash flow from the partnership. This lowers their cost of capital and makes them more competitive going after new assets. In addition, just like other MLPs, there are many opportunities ahead for growth. The future looks bright indeed.
Is EPD a buy at current levels? As I’ve said about the MLP space in general , EPD seems a bit frothy but is not overvalued. The chart below shows the partnership’s historical yield and spread to the 10yr note.
While EPD is trading below its average yield it is still above its average spread suggesting that the stock still has some room to run. However, I would not say its a screaming buy at these levels. A correction would sure be nice! I continue to be long MLP and continue to re-invest my dividends.
In summary, EPD has impressive track record and is very well positioned for more future growth and the coming changes in the MLP landscape. It is my favorite MLP at this point and I can safely see 10% annual returns from here.
Disclosure: long EPD, KMP