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High-Yield Enbridge Energy Partner's 10% Dividend Just Got Safer

Sean O'Reilly, The Motley Fool

It's not often that management of a company with a high-yield stock broadcasts the operating plans that solidify its yield, but that's exactly what investors in Enbridge Energy Partners (NYSE: EEP) recently received. On Nov. 29, the partnership went public with its guidance for the coming year as well as its outlook for 2018 through 2020.

The plans solidified its current yield of 10%. Not only that, but management expects the payout to grow at around 3% per year through 2020.

Investors were rightly shocked by the news, sending shares up by as much as 10%. Enbridge Energy Partners and its parent, Enbridge, Inc. (NYSE: ENB), have made multiple moves in recent years that would leave anyone's head spinning. But the ship seems to have been righted, and the stock's sky-high yield appears safe for the foreseeable future in light of the outlook's key details. In fact, for venturesome investors, EEP is a great high-yield stock to consider heading into the new year. 

An oil pipeline spanning a prairie

Image source: Getty Images.

So everything is OK, after all?

The past year was tumultuous for investors in Enbridge Energy Partners.

First came its move to absorb the rest of its own publicly traded subsidiary, Midcoast Energy Partners, in January. This step was devastating to the stock, sending shares down 25% in January alone. As noted by my colleague Tyler Crowe at the time, the move had more to do with the plans of the parent company -- Enbridge, Inc. -- than anything else.

True, the move simplified an incredibly complex business structure. But the step raised the question: Why was Midcoast spun off in 2013 in the first place? Were investors to think that the previous three years were a wasteful experiment that left the company overleveraged?

EEP Debt to Assets (Quarterly) Chart

EEP Debt to Assets (Quarterly) data by YCharts.

Enbridge, Inc. is now the biggest energy-infrastructure operator in North America, thanks to its acquisition of Spectra Energy. It was this merger that drove the parent company to simplify its overall empire: It needed to ensure that its kingdom functioned smoothly.

Spectra Energy had, until the merger, been a competitor of many Enbridge entities -- particularly Midcoast. By bringing Midcoast back home, EEP hoped to avoid infighting for precious capital and to manage its assets more effectively.

This summer, that is precisely what happened. On June 28, the companies announced that Enbridge Energy Partners' interest in Midcoast's gas gathering and processing business was now a part of Enbridge Inc.'s domain. The gas gathering and processing arms of Midcoast and Spectra Energy were finally under the same umbrella.

Investors aren't wrong to find this game of corporate musical chairs a little suspicious; corporate history is rife with tales of companies making moves that fail to enrich shareholders. Fortunately, that doesn't seem to be the case here. And we got our first hints as to why with management's updated outlook.

Back to business

What investors now have in Enbridge Energy Partners is a pure-play liquids pipeline company. Its most notable asset is its management of the U.S. portion of the Mainline system, called Lakehead. Lakehead is a pipeline system controlled by Enbridge, Inc. which, with the assistance of the company's other pipelines, is responsible for transporting 2.8 million barrels of crude oil per day.

Now that it's made the shift toward being purely a liquids pipeline company again, management has gotten back to basics. In its Nov. 29 release, the company said that in 2018 it expects operations to generate somewhere between $775 million and $825 million in distributable cash flow (DCF).

This on its own is big news. DCF is an all-important metric in the energy infrastructure industry, as it is what management uses to decide how much of a dividend to pay out. The midrange figure of $800 million would allow the company to cover the current $1.40-per-share annual payout by about 1.2 times.

Executives also expressed optimism that the Mainline system (which is currently undergoing an expansion) and Bakken pipeline system would generate even higher earnings in the years ahead. As U.S. natural gas production continues to rise, demand for the use of these two systems rises along with it, and therefore rates do as well.

Management also said that the payout would likely grow by 3% per year through 2020. That's nothing to write home about, but significant, given the company's relatively weak payout coverage.

A slower rate of payout growth would also allow the company to get its balance sheet back in order. Management is targeting a debt-to-EBITDA ratio of 4 by 2020.

The high-yield investor's bottom line

Enbridge Energy Partners' management has told the market exactly what it needed to hear.

True, EEP's payout coverage isn't as high as many of its peers', but given what the company has been through during the last 12 months, the clouds do seem to have parted.

Investors who have been following EEP's story with interest but who have remained on the sidelines should give its shares another look. Management has reiterated the payout and is taking the steps necessary to reduce leverage. Eight years into a bull market, a dividend yield of nearly 10% is a great place to start for substantial returns.

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Sean O'Reilly owns shares of Enbridge Energy Partners. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool has a disclosure policy.