Energy Transfer Partners LP: Battered MLP Now Pays 12% Income Investors 2018-06-19 14:52:05 Energy Transfer Partners LP NYSE:ETP etp stock dividend stocks high yield stocks etp dividend Traders have begun giving up on Energy Transfer Partners L.P. (NYSE:ETP). So is it time to give up on this master limited partnership? Dividend Stocks,News https://www.incomeinvestors.com/wp-content/uploads/2018/06/etp-stock-150x150.jpg

Energy Transfer Partners LP: Battered MLP Now Pays 12%

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MLP Yield Hit Double Digits

In the energy patch, white-hot demand for oil stocks have sent shares surging. Meanwhile, traders have left Energy Transfer Partners LP (NYSE:ETP) stock out in the cold.

As energy stocks soar on higher oil prices, Energy Transfer Partners has done the opposite. Hit by new regulations, higher interest rates, and sluggish earnings growth, units of the master limited partnership (MLP) have skidded 30% over the past two years.

To be sure, Energy Transfer Partners isn’t the only pipeline owner struggling. Dozens of MLPs have cut their distribution in recent months. Since the start of the year, Wall Street has pulled hundred of millions of dollars out of the industry.

So should investors dump ETP stock? Personally, I’m sticking with this business. If anything, investors might even want to consider adding to their position if the price weakens further, given it often pays to buy wonderful businesses when they go through a temporary setback.

As an income investor, I stay focused on the long haul. Although MLPs clearly face some challenges, the industry has battled through commodity cycles before. The best companies emerge through the turmoil, often in a stronger position than they started. You shouldn’t expect this cycle to be any different.

In the meantime, unitholders get paid a juicy 12% yield. Sure, red lights should start flashing any time you see a yield this high. But in the case of ETP stock, this distribution looks reasonably safe.

In 2017, ETP generated $4.2 billion in distributable cash flow. During the same period, management paid out $3.5 billion to unitholders in distributions. This comes out to a payout ratio of 83%.

Generally, I like to see firms pay out no more than 75% of profits as dividends. This ensures executives have a little bit of wiggle room. But given the predictable nature of the pipeline business, investors shouldn’t lose too much sleep.

Of course, no business can keep boosting its distribution without growing profits. Lower oil prices reduce the pace of production industry-wide. That resulted in slower earnings growth for pipeline business. But again, it’s worth looking at the long term.

Building a new pipeline presents a difficult challenge. You have to secure rights-of-way from regulators and landowners. As a result, most of Energy Transfer Partners’ pipelines have a monopoly over the markets they serve. This allows management to quietly raise toll fees each year.

Higher oil prices have also rekindled the energy patch. In many parts of the country, especially in the fast-growing shale plays of West Texas, oil production has already exceeded available pipeline capacity.  To address the infrastructure problem, the company has plowed billions into constructing new terminals, storage tanks, and processing plants. That should eventually result in growing profits–and by extension, growing distributions–in the years to come.

The biggest challenge for ETP, however, will come from Washington. Earlier this year, the Federal Energy Regulatory Commission started moving to close certain tax loopholes exploited by pipeline owners. The decision threatens the main reason why many investors bought MLPs in the first place. (Source: “Energy’s Favorite Corporate Structure Falls Out of Vogue,” The Wall Street Journal, March 16, 2018.)

That said, the company will survive the changes better than most. After the regulatory decision, the partnership issued a press release to investors describing the impact of the new rules. While traders have assumed the worst, the real numbers don’t look so worrying.

“These revisions are not expected to have a material impact to ETP’s earnings and cash flow,” the partnership explained. “Many of ETP’s rates are set pursuant to negotiated rate arrangements or rate settlements that it believes would not be subject to adjustment, or would be limited in terms of adjustment.” (Source: “Energy Transfer Announces It Expects No Material Impact from FERC Policy Revisions,” Energy Transfer Partners LP, March 15, 2018.)

Although traders have left pipeline stocks in the cold, it would be foolish to count Energy Transfer Partners LP out. With its high yield, growing profits, and entrenched market position, investors should give this partnership a second look.

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