Written by Summary
EPD has been very hesitant to increase unitholder capital returns despite peers doing so and EPD’s balance sheet becoming stronger than ever.
Management indicated on the Q3 earnings call that they may increase unitholder capital returns in the near future.
We list three reasons why we think Enterprise Products Partners should increase the distribution and forego buybacks.
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PM Images/DigitalVision via Getty Images Enterprise Products Partners ( EPD ) has been very hesitant to increase unitholder capital returns despite peers doing so and EPD’s balance sheet becoming stronger than ever.
Management indicated on the Q3 earnings call that they may increase unitholder capital returns in the near future, stating: Finally, [a priority] will be to execute buybacks on an opportunistic basis. As we have for the past several years, we plan to announce distribution growth guidance for 2022 in January. An analyst also pressed them on capital returns in the Q&A session, asking: I was wondering if you can share your latest thoughts around potentially accelerating return of capital. Many of your peers are pursuing buybacks. Some have announced special increases and so forth, we’re seeing positive stock reactions. A lot of the producer customers are electing to pursue buybacks instead of investing in growth. And so kind of wondering about your latest thoughts. In the past, you’ve mentioned some uncertainty with respect to Washington, but there’s now a draft reconciliation bill out. Has that thought process changed at all? And if so, is there a preference towards buyback given where the stock is trading or would you be thinking about these distribution increases or special distribution increases? Management responded with: when we think about allocation of capital, it’s all-of-the-above approach. We have been deliberate on buybacks. And some of that is because of the legislative and regulatory uncertainty. And we — as far as — looking out, we’re still working, you may see clarity in Washington, D.C, we don’t. And I think we’ll get — will come in and get better clarity over the next few months… we’re one of the highest in paying out returning capital to our investors. And again, that’s principally through distributions… We’ll come in and announce what our plans are for distribution increase next year in January. I would note that 2021 marks our 23rd year of distribution growth. I don’t think any other midstream company can say that. And so it’s our practice to return capital to investors and that includes both distributions and buybacks. Management also gave one more key insight into capital returns moving forward in response to the analyst question: To the extent that we see inflation, what’s the philosophy around the distribution regarding inflation? Management stated: On inflation, I want to say over 90% of our revenues have some sort of escalation mechanism in there, which are benchmarked to various indices. So we feel like we have a pretty good protection from inflation… As far as how we think about the distribution, really what we’re trying to achieve is trying to keep to purchase power parity. And so we would like to come in, and with the increased inflation, have an increase in the distribution growth rate compared to what you’ve seen over the last 3 or 4 years. In this article, we will discuss three reasons why we think EPD should forego buybacks and increase the distribution instead. #1. EPD Distributions Are More Tax Efficient Than Buybacks
While with investment vehicles that pay out qualified or ordinary dividends (i.e., corporations and REITs), buybacks actually tend to be more tax-efficient, for MLPs like EPD and other investment vehicles that pay out distributions , buybacks are actually less tax efficient.
This is because whenever you receive a dividend, it is typically taxed in the year in which it was received at the long-term capital gains tax rate or your top income tax bracket rate, depending on whether or not the dividend is deemed to be qualified or not. As a result, you pay taxes immediately on those profits, even if you merely reinvest the capital into buying more shares of the same company.
In contrast, when a company instead directs that cash flow towards buybacks, you do not pay any tax on that capital return as long as you continue to hold the shares. From an intrinsic value standpoint – as long as the shares […]
Written by Summary