Energy Transfer LP: Can Investors Count on This 6.5% Yielder From Energy Sector?
This High-Yield Stock Deserves a Serious Look
One sector that continues to offer oversized dividends to investors in today’s market is energy. But investors should be aware of the risks before jumping in.
You see, commodity prices are highly volatile. When things are good, many energy companies gush cash flow and are able to pay hefty dividends. When oil prices tumble, though—like what happened at the onset of the COVID-19 pandemic last year—things can change very quickly for these operators, and they sometimes cut their dividends.
Now, if you’re okay with that volatility, here’s a midstream energy stock worth considering for yield-seeking investors: Energy Transfer LP (NYSE:ET).
As its name suggests, the company’s business focuses on the transportation of energy. The partnership owns and operates one of the largest and most diverse portfolios of energy assets in the U.S., with a strategic footprint in all of the major production basins in the country. Its portfolio includes natural gas transportation and storage assets; crude oil, natural gas liquid (NGL), and refined product transportation and terminaling assets; NGL fractionation assets; and various acquisition and marketing assets.
Energy Transfer LP stock pays generous distributions. Right now, the partnership has a quarterly distribution rate of $0.1525 per unit, which translates to an annual yield of 6.5%.
However, as mentioned earlier, dividends in the energy sector aren’t carved in stone. In October 2020, the partnership announced a 50% reduction in its quarterly distribution from $0.305 to $0.1525 per unit. (Source: “Distribution History,” Energy Transfer LP, last accessed September 14, 2021.)
In other words, while ET stock is a high yielder, its current payout level is actually the result of a distribution cut.
That said, with a lower distribution, the partnership was able to provide very strong coverage. In 2020, Energy Transfer generated $5.7 billion in adjusted distributable cash flow. Its actual cash distributions, on the other hand, totaled $2.5 billion for the year. That resulted in a distribution coverage ratio of 2.3, leaving a margin of safety. (Source: “Energy Transfer Reports Fourth Quarter 2020 Results,” Energy Transfer LP, February 17, 2021.)
According to its latest earnings report, Energy Transfer generated $1.4 billion in adjusted distributable cash flow in the second quarter of 2021. Considering that the partnership paid $414.0 million of cash distributions to unitholders for the quarter, its distribution coverage ratio was 3.4. (Source: “Energy Transfer Reports Second Quarter 2021 Results,” Energy Transfer LP, August 3, 2021.)
If you include the first-quarter results—which were quite stellar—you’ll see that, in the first six months of 2021, Energy Transfer had achieved an even better distribution coverage ratio of 6.4.
When a company is able to substantially outearn its dividends, it creates room for future dividend hikes.
Indeed, in the company’s latest earnings conference call, Energy Transfer’s co-chief executive officer, Tom Long, talked about that possibility: “…we will look to return additional capital for unitholders in the form of unit buybacks and/or distribution increases with the mix dependent upon our analysis of market conditions at the time.” (Source: “Energy Transfer LP (ET) Q2 2021 Results – Earnings Call Transcript,” Seeking Alpha, August 3, 2021.)
It’s worth noting that, while Energy Transfer LP stock is an energy stock, approximately 95% of the company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2021 is expected to come from fee-based operations. This should limit the partnership’s exposure to commodity price volatility.
Bottom Line on Energy Transfer LP
Ultimately, I’m not saying that Energy Transfer LP is the perfect dividend stock.
But considering that the partnership offers a well-covered 6.5% yield and has the potential to increase its payout going forward, ET stock could be a good opportunity for yield-seeking investors.