I can only think of two possible disadvantages. One of them is that the stock's valuation gets too frothy. The other applies only when a stock pays dividends. If you buy more shares, the dividend yield may become less attractive.
Those are minor negatives that probably won't bother too many investors very much. If a stock surges but retains an attractive price, it may still be attractively valued as a dividend. The example immediately comes to my mind. This stock has just hit its 52-week high, but it's still a good buy.
The company's stock has surged by nearly 15%, bringing its total to more than $11 billion. On Sept. 22 and Sept. 2023, its share price reached a 52-week high. The performance is a little better than what the S&P 500 has delivered.
The share price appreciation of Enterprise Products Partners is only a part of the story. With them included, Enterprise's total return so far this year is close to 20%, far ahead of the S&P 500's total return of 14%.
Even with its nice gain, Enterprise Products Partners' distribution yield of more than 7.3% remains exceptional. Investors should be able to count on bigger distributions as well. For 25 years, Enterprise has seen a surge in its distribution.
The S&P 500's performance in 2023 has made it relatively expensive by several metrics. The S&P 500's cyclically adjusted price-to-earnings ratio is historically in historic high territory.
However, value doesn't seem to be a problem for Enterprise Products Partners. Its shares are still trading at a forward earnings multiple of just 10.2x. In contrast, the S&P 500 trades at about 18.8x forward earnings. The overall energy sector is cheaper than the overall energy sector, which currently has a forward earnings multiple of 12x.
This year, Enterprise Products Partners' stock success is proof of a robust underlying business. The company operates over 50,000 miles of pipelines in the U.S. that transport natural gas liquids, natural gas, crude oil, and petrochemicals. Enterprise also owns a variety of assets such as natural gas processing plants and fractionators.
The company has a robust balance sheet with a leverage ratio of 3x and a liquidity of around $4 billion. The energy sector's credit rating is the highest in the midstream energy sector.
Over the last 10 years, enterprise has delivered an average return of 12% on invested capital. Even during the financial crisis of 2007 and 2008, its ROIC remained at 10% or higher, even during the oil price collapse of 2014 through 2017 and the COVID-19 pandemic that began in 2020.
What is something you don't like?
This worry largely explains why Enterprise's valuation isn't higher. But I don't foresee the company running into major problems for a long time to come, if ever.
Although renewable sources can't meet all of the world's energy needs, they're capable of addressing all of the world's energy demands. Even with the increased adoption of wind and solar energy, the U.S. Energy Information Administration anticipates that worldwide fossil fuel consumption will increase by 2050.
In addition, light hydrocarbon products like NGLs should be viewed with increased demand. I don't see much not to like about this stock. It's performing well, he said. It has a very high yield. It has a bargain valuation. In my view, Enterprise Products Partners meets all the boxes for income investors.