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When the market drops like it has over the past couple of months, it tends to punish indiscriminately. While that can mean some OK businesses are selling for incredibly cheap prices, it can also mean that great companies are selling for decent prices. Times like this can be a great opportunity to buy high-quality businesses at much more attractive valuations. One company that has been swept up in this recent stock decline is Enterprise Products Partners (NYSE: EPD). Enterprise is one of the best-run oil and gas pipeline, processing, and logistics businesses in the U.S. with a history of steadily rewarding shareholders.
Even though Enterprise is a great business to own over the long haul that pays a large distribution to its investors, its stock has been dragged down low enough that it currently sports a distribution yield of 7.1%. A yield that high for a business this strong seems almost too good to be true. So let's take a look at what investors can expect in 2019 to see if maybe there are some concerns we may be overlooking.
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Big investments going live
Back in 2017, Enterprise's management made a daring decision. It told investors that it was going to slow the rate at which it grows its payout. The decision to slow this growth rate was to retain more of its operating cash flow over time and reinvest it in the business. Management called this "self-funding the equity portion of its capital funding." This is jargon for saying it will use its own cash flow and debt to cover its capital spending rather than issue new units of the master limited partnership for funding purposes.
Enterprise's decision to retain more cash flow likely came down to three factors: 1) With a high distribution yield, issuing units was a relatively high cost of capital; 2) Its debt load was creeping up; and 3) It had a lot of capital spending projects to build. With so much cash expected to go out the door for growth, it made sense to keep that cash and not run into the problem of having too much debt or being reliant on issuing shares to pay for those projects.
That decision was well timed because it expects to complete several projects in 2019. According to management, Enterprise will bring $4.5 billion worth of new projects into service in 2019, including some needle-moving assets like two Permian-to-Gulf-Coast crude oil pipelines, a petrochemical manufacturing plant, and a new petrochemical export facility. This wave of spending from 2017-2019 was unprecedented and will represent a significant increase in annual EBITDA. Management anticipates that all of these projects going live will lower its leverage -- measured as debt to adjusted EBITDA -- to 3.5 times, the lowest level in five years.