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Enterprise Products’ Attractive Spread over Treasury Yield

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Yield spread

Enterprise Products Partners (EPD) is trading at a yield of ~6.2%, which is ~380 basis points higher than the US ten-year Treasury yield. Interestingly, this spread was just ~170 basis points five years back. With the US ten-year Treasury yield roughly around the same level as it was five years ago, the rise in the EPD-Treasury yield spread was largely attributed to the rise in Enterprise Products’ yield.

The above graph shows Enterprise Products Partners’ forward distribution yield, and the US ten-year Treasury yield over the last five years. As the graph shows, EPD’s yield averaged ~6.3% over the last three years, which was higher than the average of ~5.7% over the last five years.

Enterprise Products Partners’ yield rose from ~4.0% at the end of 2014 to close at 8% in February 2016 when the stock price fell close to $20. Since then, the yield has lowered, though it remained higher than the five-year average.

Enterprise Products Partners’ yield has remained relatively range-bound over the last three years, reflecting the sideways movement of the stock’s price, as discussed in the previous article.

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Attractive yield

At ~6.2%, Enterprise Products Partners has a higher yield than some of its peers. Plains All American Pipeline (PAA) is trading at a yield of ~5.0%, and Kinder Morgan (KMI) is trading at a yield of ~4.0%. In comparison, Energy Transfer (ET) and Magellan Midstream Partners (MMP) are trading at higher yields of ~8.0% and 6.6%, respectively.

Enterprise Products Partners has increased distributions for 58 consecutive quarters. Its coverage ratio for 2018 was 1.5x.

Let’s next take a look at EPD’s distributable cash flow growth over the years.

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