Energy Transfer LP: The Best 8.6% Yielder on the Market?
A High-Yield Stock to Think About
When it comes to stocks yielding eight percent or more, few look as solid as this one. I’m talking about Energy Transfer LP (NYSE:ET), a master limited partnership (MLP) headquartered in Dallas, Texas.
Energy Transfer is a big player in America’s energy business, owning and operating a large and diversified portfolio of infrastructure assets. Through these assets, the partnership provides a wide range of services, including the transportation and storage of crude oil, natural gas, refined product, and natural gas liquids—among others.
Over the past several years, the energy industry in America has been volatile, to say the least. But Energy Transfer has churned out some very impressive growth numbers.
According to the company’s latest earnings report, the partnership generated adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) of $2.8 billion in the first quarter of 2019. This not only represented a whopping 40% increase year-over-year, but also marked a new record for the partnership. (Source: “Energy Transfer Reports Record First Quarter 2019 Results While Delivering On Capital Project Backlog,” Energy Transfer LP, May 8, 2019.)
For full-year 2019, management expects Energy Transfer to earn adjusted EBITDA of between $10.6 to $10.8 billion. At the midpoint of the guidance range, the partnership would achieve a compound annual growth rate (CAGR) of 17% in adjusted EBITDA from 2015 to 2019. (Source: “Energy Transfer June 2019 Investor Presentation,” Energy Transfer LP, last accessed June 24, 2019.)
In a period when many energy companies have been struggling, a CAGR of 17% would be quite impressive.
Still, Energy Transfer’s numbers did not really cheer up stock market participants. In just the past 12 months, Energy Transfer stock tumbled 17.5%. If you look further back, you’ll see that, over the last five years, the stock is down more than 50%.
Now, what does that mean for income investors?
Well, we know that, at any given cash payout, a company’s dividend yield moves inversely to its stock price. So if Energy Transfer’s cash distributions remained the same, the massive drop in its unit price would have boosted its yield.
But ET stock’s cash distributions did not remain the same. As a matter of fact, they’ve been increasing for quite some time. Over the past five years, the partnership’s quarterly cash distribution went from just under $0.18 per unit (split adjusted) to almost $0.31 per unit, representing a total increase of over 70%. (Source: “Distribution History,” Energy Transfer LP, last accessed June 24, 2019.)
Therefore, in the calculation for Energy Transfer stock’s yield, we have a numerator (cash distribution) that was increasing while the denominator (stock price) was decreasing. As a result, the annual yield of the stock soared. Trading around $14.20 per unit as of this writing, ET stock offers an annual distribution yield of 8.6%.
Energy Transfer LP Is Maintaining a Safe Payout
Of course, in this day and age, a beaten-down stock with a sky-high yield doesn’t really seem to be the safest bet. However, as we looked at earlier, Energy Transfer’s business has actually been improving.
And if you are concerned about Energy Transfer stock’s distribution safety, don’t be. Despite its oversized cash payout, the partnership actually maintains top-notch distribution safety.
You see, in the MLP business, one of the most important financial metrics we look at is distributable cash flow. At Energy Transfer, the partnership calculates distributable cash flow by taking net income, adjusting for certain non-cash items, and then deducting maintenance capital expenditures and distributions to preferred unitholders.
By comparing ET’s distributable cash flow to its cash distributions in a given reporting period, investors can get an idea of whether the partnership generated enough cash to cover its payout.
Last year, Energy Transfer generated $5.4 billion in distributable cash flow while paying out $3.1 billion in cash distributions. That translated to a distribution coverage ratio of 1.74 times, meaning the partnership generated 74% more cash than what was needed to cover its payout. In the world of high-yield MLPs, that’s considered a very wide margin of safety. (Source: “Energy Transfer Reports Fourth Quarter 2018 Results with Record Performance and Continued Growth,” Energy Transfer LP, February 20, 2019.)
And things got even better in the first quarter of 2019. For the quarter, Energy Transfer’s distributable cash flow grew 39% year-over-year to almost $1.7 billion. That amount covered its $800.0-million total cash distribution for the quarter more than twice over.
Looking ahead, management expects Energy Transfer’s long-term distribution coverage ratio to be in the range of 1.7 to 1.9 times.
The Bottom Line on Energy Transfer LP
At the end of the day, keep in mind that one of the most important reasons why Energy Transfer can deliver solid financials in a volatile commodity price environment is its fee-based business model.
For instance, in its “Midstream” segment, the partnership does business through contracts that have specified minimum volume commitments, acreage dedication, utilization-based fees, and percent of proceeds. In its “Interstate Transportation & Storage” segment, Energy Transfer earns fees based on reserved capacity, regardless of usage.
Add it up and you’ll see that the partnership makes most of its money from fee-based operations. Therefore, it can generate a relatively stable stream of cash flow despite commodity price volatility.
Ultimately, no one can predict stock price movement with certainty. Even though Energy Transfer LP runs a solid business and generates impressive financials, it may take a while for ET stock to bounce back from its downturn.
Still, that means for dividend hunters, a solid 8.6% yielder could be up for grabs.