Energy stocks have risen significantly this year. The S&P Energy Select Sector Index is up 36% so far in 2021. That, however, doesn’t mean that the bargains in the sector have completely gone away. Three pipeline stocks — Enbridge (NYSE:ENB), Enterprise Products Partners (NYSE:EPD), and ONEOK (NYSE:OKE) — look attractive despite their rise this year. Let’s see what makes these stocks a buy right now.
Steady cash flows
All three companies generate relatively steady cash flows. Because they’re in the midstream segment of the energy sector, their earnings are relatively less impacted when oil and gas prices fall compared with earnings of those engaged in oil and gas production. That’s because the earnings of these three companies are backed by long-term, fee-based contracts.
Though the contract rates may get impacted if commodity prices remain suppressed for extended time periods, the companies’ earnings are not much affected by short-term commodity price fluctuations.
Roughly 87% of Enterprise Products Partners’ 2020 earnings were fee-based. Similarly, more than 90% of ONEOK’s 2020 earnings were fee-based. Likewise, Enbridge’s regulated gas transmission and distribution operations provide it with a fairly steady income stream. Tolls for its liquids pipelines are set for the long term and approved by the Canada Energy Regulator. So, the earnings of all the three companies are relatively resilient to commodity prices. For that reason, they have been able to steadily grow their earnings over the years.
As the above graph shows, all three companies’ earnings and operational cash were largely on an upward trend over the past 10 years. This included periods of a steep fall in commodity prices, including the years 2014 and 2020.
Solid dividend growth and yields
All three also have a strong track record of dividend growth. Enterprise Products Partners has increased its distribution for 22 years in a row, while Enbridge has increased its dividend for 26 straight years. ONEOK has a dividend growth history of more than 30 years, although it had a small indirect cut through its master limited partnership (MLP) in 2017.
Moreover, despite the rise in their stock prices this year, the three stocks are trading at yields higher than their respective historical average yields. That’s because the stocks have recovered only some of their losses from last year. Dividend investors will surely find the high yields attractive.
Balance sheet strength
Often, high yields are associated with high risks. But that isn’t the case for Enbridge, Enterprise Products, or ONEOK. All three stocks have reasonable debt-to-EBITDA ratios, with Enterprise Products being the most conservative of the lot.
In comparison, Enbridge’s higher ratio can be attributed to its slightly aggressive approach toward growth. Yet, the ratio has improved significantly recently, thanks to the company’s EBITDA growth. Strong balance sheets give the three companies flexibility to raise funds at reasonable rates when needed. It also means that in challenging times, if earnings fall, the companies can rely on their balance sheets, rather than being forced to cut their payouts.
Another metric that reflects the long-term durability of dividend payments is the percentage of distributable cash the companies pay out as dividend. In the latest quarter, Enterprise Products Partners’ distributable cash flow (DCF) was 1.7 times its distributions for the quarter.
Enbridge aims to pay 60% to 70% of its DCF as dividends while retaining the rest. Based on its 2021 guidance for dividend and DCF, its ratio would be within its targeted range. Likewise, ONEOK’s DCF in Q1 was 1.59 times its dividends paid for the quarter.
Top dividend stocks
All three companies have a healthy backlog of capital projects. That means they can not only maintain their payouts over the coming years but also grow them. In short, all three stocks are attractive buys, especially for dividend investors.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.