Should You Buy Enterprise Products Partners While It's Below $41?

Enterprise Products Partners (NYSE: EPD) is a high-yield midstream master limited partnership (MLP). It is one of the largest midstream players in North America and has been a conservatively run and reliable income investment for decades. But the MLP's unit price is marching steadily back toward the all-time high reached in 2014. Is it worth buying at such a lofty level? Yes, and here's why.

What does Enterprise Products Partners do?

As noted, Enterprise is one of the largest midstream businesses in North America. The midstream segment of the energy sector basically connects the upstream to the downstream and the rest of the world. The upstream is where energy is produced. The downstream is where it is processed into chemicals and refined products. The midstream is, effectively, the pipeline between the two and the business is built on a toll-taker model.

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While commodity prices heavily impact upstream and downstream businesses, demand is the key factor for midstream businesses. Since energy is so important to modern life, demand for the services Enterprise provides tends to be robust regardless of oil prices. The reliable cash flows here support the MLP's distribution, which has been increased annually for 26 consecutive years.

Now throw in the fact that Enterprise has an investment-grade-rated balance sheet. And the fact that its distributable cash flow covers its distribution by 1.7x. Basically, there's a lot of leeway before a distribution cut would be on the table. This is an attractive income investment, particularly for more conservative investors.

Should you buy Enterprise as it rises toward its all-time high?

While Enterprise's fundamentals make it attractive, what about the price? The high-water mark for the MLP's units came in late 2014, at around $41 per unit. That was a point when Wall Street was particularly enamored of the midstream sector. But, as is normal, mercurial investors lost interest in the sector during an energy downturn and Enterprise's unit price cratered.

The units have been heading steadily higher of late and are at around $31 per unit. But there's a big difference between late 2014 and today thanks to the reliable distribution growth that has occurred over the years. In 2014 Enterprise's yield was just 3.4% when it hit that all-time unit price high. Today the yield is 6.7%.

EPD data by YCharts

Even if the unit price were to rise to $41, the yield would still be an attractive 5.2%. And that assumes there's no further distribution growth, which seems highly unlikely. In fact, the reliable distribution growth is really what's helping to power the units higher. More increases are probable and will probably lead to more price gains. In other words, expect Enterprise to reach that $41 high-water mark again at some point, perhaps soon.

The buy decision is relative with Enterprise

Very often when a stock is closing in on all-time highs it is a sign that the price tag is getting a little too steep. But everything is relative, and that's very important to keep in mind with Enterprise. Given its distribution growth, the valuation it was afforded in 2014 isn't the same as the valuation the same price will lead to in 2025. The business appears to, legitimately, be worth more now. And the yield, even if the price were $41 per unit, would still make Enterprise more attractive today than it was back in 2014.

Should you invest $1,000 in Enterprise Products Partners right now?

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.