This Ultra-High-Yield Dividend Stock Just Hit Its 52-Week High but Is Still a Bargain Buy

It’s great when a stock that you own soars. I can only think of two possible downsides. One is that the stock’s valuation gets too frothy. The other applies only when a stock pays dividends. It’s possible that the dividend yield could become less attractive if you want to buy more shares.

Those are minor negatives that probably won’t bother too many investors very much. And sometimes, a stock can skyrocket yet remain attractively valued while offering a juicy dividend. One example immediately comes to my mind. This ultra-high-yield dividend stock just hit its 52-week high and is still a bargain buy.

Flying high

Enterprise Products Partners (EPD 0.51%) stock has jumped nearly 15% year to date. Its share price reached a 52-week high on Sept. 22, 2023. This performance is a little better than what the S&P 500 has delivered.

However, the share price appreciation for Enterprise Products Partners only tells part of the story. The company’s distributions make a big difference, too. With them included, Enterprise’s total return so far this year is close to 20% — well ahead of the S&P 500’s total return of 14%.

Even with its nice gain, Enterprise Products Partners’ distribution yield of over 7.3% remains exceptionally attractive. Investors should be able to count on larger distributions going forward as well. Enterprise has increased its distribution for 25 consecutive years.

Still cheap

The S&P 500’s performance in 2023 has made its valuation relatively expensive by several metrics. In particular, the S&P 500 cyclically adjusted price-to-earnings (CAPE) ratio is in historically high territory.

Valuation doesn’t appear to be a problem for Enterprise Products Partners, though. Its shares still trade at a forward earnings multiple of only 10.2x. By comparison, the S&P 500 trades at roughly 18.8x forward earnings. Enterprise is also cheaper than the overall energy sector, which currently has a forward earnings multiple of 12x. 

A solid business

Enterprise Products Partners’ stock success this year reflects a solid underlying business. The company operates more than 50,000 miles of pipelines in the U.S. that transport natural gas liquids (NGLs), natural gas, crude oil, and petrochemicals. In addition, Enterprise owns a variety of other assets including natural gas processing plants and fractionators. 

The company boasts a strong balance sheet with a leverage ratio of 3x and liquidity of around $4 billion. Its credit rating ranks as the highest in the midstream energy industry. 

Enterprise has delivered an average return on invested capital (ROIC) of 12% over the last 10 years. Its ROIC remained at 10% or higher even during the financial crisis in 2007 and 2008, the oil price collapse of 2014 through 2017, and the COVID-19 pandemic that began in 2020. 

What’s not to like?

The biggest knock against Enterprise Products Partners is that climate change concerns are driving a shift from fossil fuels to renewable energy. It’s possible that the demand for the company’s pipelines could decline in the coming years. This worry largely explains why Enterprise’s valuation isn’t higher. However, I don’t foresee the company running into major problems for a long time to come, if ever.

Renewable sources can’t meet all of the world’s energy needs. Even with the increased adoption of wind and solar energy, the U.S. Energy Information Administration projects that fossil fuel consumption will increase worldwide through 2050. 

In particular, light hydrocarbon products such as NGLs should enjoy stronger demand. This bodes well for Enterprise Products Partners’ future. 

Overall, I don’t see much not to like about this stock. It’s performing well. It offers an ultra-high yield. It has a bargain valuation. And the long-term prospects appear solid. Enterprise Products Partners checks off all the boxes for income investors, in my view.

Keith Speights has positions in Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

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