More than 50 years ago, Charlie Munger told his partner that, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." This would become a sort of guiding principle as Munger and Warren Buffett built their empire, Berkshire Hathaway.
Like many fans of Munger and Buffett, I keep these sage words in mind when looking for my next investment. And of course, there's no shortage of "wonderful businesses" in the stock market; the problem is that most of them are trading at a premium in today's lofty market environment.
Last August, I told my premium Top Stock Advisor readers about the numerous indicators pointing toward high market valuations. More specifically, I mentioned that the S&P 500 was sporting a forward 12-month P/E ratio of 17.7, which is higher than the five-year average of 15.4 and the 10-year average of 14. On top of that, the cyclically adjusted price-to-earnings ratio, or CAPE, had surpassed the levels of 2008 and was nearing Great Depression-era levels.
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With the market at high valuations -- and with a full nine years of bull market gains behind us -- I wanted to shift my focus for my next Top Stock Advisor pick toward a more "conservative" stock with a respectable yield.
I wasn't willing to compromise my guiding principles of finding a great company with great assets just to find a stock with a high yield. In other words, I didn't want to go yield chasing. I wanted to find a wonderful stock, with a great yield, while still paying a fair price, which I believe I did.
And best of all, this recommendation sports a yields of 6.0%.
This company holds what we like to call around the office an "irreplaceable asset." That is, something that gives a company a major leg up over its peers. Something no one can easily come along and replicate or build another of.
For example, nobody is going to come along and build another Empire State Building. In fact, you can actually invest in this building through the Empire State Realty Trust (NYSE: ESRT).
But that's not what I'm recommending today.
A Rare Yield At A Discount
Enterprise Products (NYSE: EPD) is the largest master limited partnership (MLP) in America. The company owns more than 50,000 miles of pipelines -- enough to circle the planet twice.
But pipelines aren't the firm's only assets. Enterprise also has its hands in a number of other areas, including storage terminals, processing, marine transportation and import/export terminals.
The company's business operations are vital in day-to-day life. Without oil, natural gas and other commodities it transports through its pipelines, stores in its terminals and processes, our lives would be drastically different. Nearly everything around us requires oil or natural gas in some form. The clothes on our back, the computer, phone or tablet you're reading this on, were all built from feedstock (oil, or natural gas).
Even though EPD operates in the oil and gas business, the company is actually somewhat insulated from the wild price swings of the commodities themselves. You see, the firm's 50,000 miles of pipeline act as "highways" for oil and natural gas. And these highways charge "tolls" or fees for every barrel of oil or gas that passes through them. In 2016, roughly 80% of the firm's business was fee-based.
As I mentioned, Enterprise Products is an MLP, or master limited partnership. MLPs are what are known as pass-through entities. That means as long as the partnership passes through at least 90% of its income directly to its partners, the firm pays no corporate taxes. As MLP investors, we are partners. Because of their favorable tax structure, MLPs are favorites among income-oriented investors.
EPD has raised its distribution for 42 consecutive quarters -- good enough to give the firm a five-year distribution growth rate of 5.8% and a current yield of 6.0%. Its next distribution was announced last month, and will be paid on February 7 at $0.425 per unit (but only to investors owning shares before the ex-dividend date of January 30).
Why Now Is The Perfect Time To Become A Partner
Enterprise Products has been a longtime favorite for many income investors... especially coming out of the financial crisis. The company went on a hell of a run, soaring from around a split-adjusted $6 per share in March 2009 to $34 a share in September 2014. That's an incredible return of approximately 511%. On top of this, the company showered shareholders with increasing distributions.
But then the price of oil tumbled from over $100 a barrel to $40 per barrel... And every oil-related business was hit. I know I said that EPD is somewhat isolated from the price of the commodities it sells, but the fact of the matter is that a drastic drop like we saw in oil is going to affect every industry it touches. Enterprise Products was no different: Its share price tumbled nearly 50% from its 2014 highs, hitting a low around $24 in late 2017.
But, again thanks to the changing fortune of oil, EPD has regained a price over $28... and could see further gains this year.
During that time the firm saw a significant decrease in revenue. Sales tumbled from nearly $48 billion in 2014 to $27 billion in 2015. But here's the thing... despite the drastic drop in revenue, Enterprise continued to increase and dish out quarterly distributions, and its operating and net income held steady...
Enterprise Products runs a great business with valuable assets. And right now we can become a partner for a huge discount...
When Enterprise Products was first recommended to readers of my colleague Nathan Slaughter's premium newsletter High-Yield Investing in 2007 its average price-to-earnings ratio was 25.7. That's a fair price to pay for a wonderful company like EPD -- and nearly identical to the 25.5 P/E it's trading for as I write this.
And it's paid off well. Since then, readers of High-Yield Investing are up over 180%.
This is an opportune time to buy a wonderful business at a fair price, while collecting a nice 6.0% yield. That's why I recently added shares to my Top Stock Advisor portfolio.
This has the makings of exactly the kind of stock my readers and I look for -- solid companies we can buy at a reasonable price, and potentially own "forever". If you'd like to learn more about the Forever Stocks we own in Top Stock Advisor, I invite you to click here.