EPD - What Me Worry? I'm Buying 2 Big Infrastructure Yields

Summary

• Buying moat-worthy high yielding stocks is a better way than trying to pinch pennies all the time.
• Owning EPD and CCI offers immediate diversification to a broad array moat-worth infrastructure assets.
• Don't be penny-wise and pound-foolish. Dividend growth is the way to go.

I have friends who count and track every dollar of spend, mostly out of worry that a significant financial event like a job loss would spell financial disaster. They deny themselves of many simple pleasures in life due to fear ruling their lives.

On the other hand, I take a different approach to financial security. I'm always looking for opportunities to increase my income while also limiting downside risk and exposure. One way I do this is by investing in high-yielding investments that own mission critical infrastructure that isn't likely to go away anytime soon.

To me, this is a better way towards becoming financially free over trying to pinch pennies all the time. This brings me to the following two picks, which offer a combination of high yield and growth. Let's take a look at each of them to see what makes them worthy buys at present.

Pick #1: Enterprise Products Partners

Enterprise Products Partners ( EPD ) (issues Schedule K-1) is one of the largest MLPs, holding valuable energy midstream and processing infrastructure across the U.S. It holds a dominant position in the NGL market and is one of the few companies to be able to capture value across the full hydrocarbon value chain. This position was further boosted by its recent acquisition of Navitas Midstream, giving EPD a strong presence in the Permian Basin.

Unlike some midstream companies that are at the whim of capital markets, EPD stands out with very strong cash flows that are well in excess of its distribution, as reflected by its DCF to dividend coverage ratio of 1.9x. This gives EPD plenty of retained capital ($3.6 billion in 2022 to be exact) to fund growth projects or reduce debt if so it chooses.

Moreover, EPD recently raised its dividend again, marking its 24th consecutive year of increases, and the current rate sits 5% above where it was last year. This is supported by one of the best balance sheets in the midstream space, with a debt to EBITDA ratio of 2.9x , sitting far below the 4.5x level that ratings agencies deem safe for the midstream space.

This is in line with management's new target leverage ratio of 3.0x, lowered from 3.5x previously. The CEO noted the rationale behind lowering its leverage target during the recent conference call :

As we looked at the financial attributes of the 65 companies that comprise the dividend aristocrats, these are the bluest of the blue chips. Some have over 60 consecutive years of dividend growth. The overwhelming majority had debt to EBITDA leverage ratios of less than 3.0 times and almost half were below 2 times.

To support our financial goals to responsibly grow the partnership and provide our limited partners with a growing and resilient stream of cash distributions over the long term, we believe we have entered into a new era, which it is wise to have a stronger balance sheet than historical norms in the energy industry.

Looking ahead, EPD has plenty of growth opportunities, as the majority of its growth capital in 2023 will be spent on a second PDH, four gas processing plants under construction in the prolific Permian basin, 12 fractionators in Chambers County, and expansions in both ethane and ethylene export facilities. Moreover, EPD should see strong petrochemical demand this year, as management expects wide gas to crude spreads to lead to U.S. petrochemicals having a very large cost advantage globally.

Turning to valuation, EPD remains attractive, especially after its recent dip below the $26 level to $25.81. At present, it trades at an EV/EBITDA ratio of 10.0x, which as seen below, sits towards the low end of its trading range in recent years. Potential price appreciation, combined with a very safe 7.6% distribution yield could result in double-digit returns for unitholders going forward.

Pick #2: Crown Castle International

Crown Castle ( CCI ), along with peer American Tower are the 2 largest cell tower REITs on the market today. CCI owns and operates 40K+ cell towers and 85K+ miles of fiber, supporting fiber solutions and small cells across every major market in the U.S. Its moat-worthy collection of assets connects populations to essential data, technology, and wireless service.

CCI benefits strong competitive advantages from limited competition, as it's one of the two largest players in the space. Once a cell tower is up and running, there is little to no incentive for a competitor to build one nearby.

Moreover, leasing additional space on an existing tower requires little to no additional capital spend, and impressively, CCI has led the U.S. tower industry in growth during the initial phase of 5G development over the last 2 years.

CCI recently showed strong full year results, with site revenues and adjusted EBITDA growing by 10% and 14% compared to the prior year. Importantly, growth is also translating to the bottom line, as AFFO per share grew by 6% in 2022. These results were driven by a combination of both external and organic growth from existing towers, the latter of which generated 6.5% YoY growth.

Looking forward, CCI has plenty of growth runway, as 5G deployment by the large carriers AT&T ( T ), Verizon ( VZ ), and T-Mobile ( TMUS ) are still in the early innings. Management seeks to capitalize on continued strong demand for its infrastructure portfolio of towers, small cells and fiber positions. This is supported by the expectation of another strong year of 5% organic growth and a doubling of small cell deployments to 10,000 nodes, with more than half of those nodes to be co-located on existing fiber, thereby strengthening CCI's "network effect".

Importantly, CCI maintains a strong BBB rated balance sheet with more than 85% fixed rate debt, and a weighted average maturity of over 8 years. It has a safe net debt to adjusted EBITDA of 5x and has $5.5 billion liquidity under its revolving credit facility.

CCI's dividend yield also now well above the 4% mark, at 4.3%, and its covered by an 85% AFFO payout ratio. CCI also has a decent track record of dividend raises, with 8 years of consecutive growth and a 5-year CAGR of 9%. Even with no external growth and relying on just organic growth, CCI could still be expected to achieve a 10% long-term growth rate, driven by the 4.3% dividend yield and 5 to 6% long-term organic growth, all while giving peace of mind with a durable business model.

Investor Takeaway

Both EPD and CCI are attractive buy-and-hold investments for income investors looking for safe, high-yielding dividend stocks. With a combination of both organic and external growth opportunities, EPD and CCI could potentially deliver double-digit total returns over the long run.

They also represent defensive sectors which should hold up relatively well in the event of a downturn in the broader markets. Lastly, owning both would give you immediate diversification to a broad set of moat-worthy infrastructure assets.

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