Comparing Lucrative Dividend Stocks: Enterprise Products Partners versus Energy Transfer
Comparing Lucrative Dividend Stocks: Enterprise Products Partners versus Energy Transfer
When you eye a high-profit investment prospect, it's essential to scrutinize the business driving the profit. That's because a profit margin is only as dependable as the enterprise backing it. If you've zeroed in on Energy Transfer (ET 0.10%) and its 6.7% distribution profit margin, you might want to ponder over Enterprise Products Partners (EPD -0.23%) and its comparatively lower 6.4% margin instead. Here's why.
Energy Transfer Falls Short of Unitholders' Expectations
Two specific instances should prompt income investors to steer clear of Energy Transfer. The first transpired in 2020, when the energy sector was grappling with a severe downturn. The downturn was understandable, given that the global coronavirus pandemic was playing havoc with economic activity. However, in an excess of caution, Energy Transfer reduced its distribution from $1.22 per unit per quarter to $0.61, a 50% reduction. That reduction would have left a substantial gap in the budget of investors relying on their portfolio's income.
The next issue can be traced back to the 2016 energy sector downturn. That's when Energy Transfer agreed to acquire its pipeline peer Williams Companies (WMB -0.04%), but then, due to the broader industry weakness at the time, subsequently withdrew from the deal. An intriguing twist was Energy Transfer's decision to sell convertible securities, a large portion of which went to the then-CEO. Energy Transfer cautioned that the merger with Williams could potentially result in a dividend cut, but the convertible securities would have, effectively, shielded the CEO from the impact of that cut. In the end, the deal was scrapped, and Energy Transfer ended up Owing nearly $500 million to Williams due to its actions - money that essentially came from the pockets of unitholders. While it was a convoluted situation, it's clear that, when tough times strike the energy sector, Energy Transfer unitholders may have valid reasons to question if their interests will be prioritized.
Enterprise Products Partners Consistently Boosts Its Distribution
Although Enterprise Products Partners' profit margin is slightly lower than Energy Transfer's, Enterprise has increased its profit margin every year for 26 consecutive years. This consistency is enough to make Enterprise Products Partners a preferable choice over Energy Transfer, especially considering that investors in Energy Transfer faced either a cut or had to be wary of the decisions being made by the management and board during those years.
This consistent profit margin growth is probably not the only reason to favor Enterprise Products Partners over Energy Transfer. The North American pipeline giant boasts an investment-grade rated balance sheet. Additionally, its distributable cash flow is more than enough to cover its profit margin by 1.7 times, offering a substantial buffer before a cut would become necessitated.
Moreover, Enterprise chose to enhance its distributable cash flow to a higher level. Previously, it averaged around 1.2 times, but Enterprise aimed to modify its business model to fund more of its capital investment projects without relying heavily on issuing more units. Acquisitions are the most probable occasion when more units might be issued, but the cash flows from acquisitions start generating returns immediately (unlike ground-up development, where assets need to be constructed before returns are realized). Therefore, dilution isn't as significant an issue. This shift required several years, but it ultimately culminated in a unitholder-friendly move that demonstrates the management's commitment to the real stakeholders of Enterprise Products Partners.
Opt for the Midstream Giant that Has Always Supported Its Unitholders
From a holistic perspective, there are certain similarities between midstream giants Energy Transfer and Enterprise Products Partners. However, when you delve a little deeper into the comparison, some significant differences come to light. The most striking difference is that Enterprise Products Partners has consistently proven to be a more reliable income investment. If you favor a restful sleep, you're likely to favor Enterprise Products Partners over Energy Transfer - even though it has a lower profit margin.
Given the unfavorable circumstances Energy Transfer faced in 2020, leading to a significant distribution cut, income investors might want to consider the consistency of Enterprise Products Partners in raising its distribution annually for 26 years, demonstrating a more dependable income source.
Despite Enterprise Products Partners having a slightly lower profit margin than Energy Transfer, its investment-grade rated balance sheet and distributable cash flow that comfortably covers its profit margin provide an added layer of security for investors, potentially reducing concerns about distribution cuts.