Insiders Loaded Up on This 19% Yielder, Should You Too?
ET Stock Offers a Jaw-Dropping Payout
When most companies are paying less than five percent in dividends, it can be hard to wrap one’s head around a yield that’s close to 20%. But it is happening. Energy Transfer LP (NYSE:ET), for instance, is offering investors an annual distribution yield of about 19%.
As the name suggests. Energy Transfer is in the energy transportation business. Structured as a master limited partnership (MLP), ET has one of the largest energy portfolios in America, with operations in 38 U.S. states, as well as in Canada and China. The company has around 90,000 miles of crude oil, natural gas, and natural gas liquids (NGL) pipelines. Approximately 30% of natural gas and crude oil in the U.S. travels through the MLP’s pipelines. (Source: “Investor Presentation June 2020,” Energy Transfer LP, last accessed July 16, 2020.)
Today, the No. 1 reason to consider Energy Transfer LP stock is the sheer size of its payout. Think about it: when dividend yields and interest rates are both near historical lows, a 19% yield could go a long way toward boosting the return of an income portfolio.
Of course, if you’ve been following high-yield stocks, you’d know that most of them are not exactly the safest bets. In particular, their share prices tend to be volatile, and dividend cuts are not uncommon.
Admittedly, ET is a beaten-down ticker. The partnership’s unit price went from $13.34 at the beginning of this year to $6.55 at the time of this writing. That’s a drop of more than 50%!
But there is one thing that should make investors take a second look at ET stock: insider ownership.
You see, even in the unprecedented economic environment caused by COVID-19, most companies’ management teams are still upbeat about their business. But talk is cheap. If a company’s management is willing to put their money where their mouth is, it should be considered a more genuine vote of confidence.
In the case of Energy Transfer, insiders and independent board members spent approximately $205.0 million over the past 12 months to purchase approximately 18.3 million units of the MLP. According to the company’s latest investor presentation, the total insider ownership is around 14.5%. (Source: Ibid.)
Other than substantial insider ownership, ET also revealed a rather strong distribution coverage in its last earnings report.
You see, because Energy Transfer is an MLP, one of the most important metrics for income investors to check in its earnings report is distributable cash flow. In the first quarter of 2020, that number was $1.4 billion. (Source: “Energy Transfer Reports First Quarter 2020 Results and Reduces Capital Expenditures,” Energy Transfer LP, May 11, 2020.)
For the quarter, the partnership paid total distributions of $823.0 million to its partners. Simple calculation shows that ET achieved a distribution coverage ratio of 1.7 times. It also means the MLP had $594.0 million in excess cash flow after distributions.
When it comes to stocks that yield 10% or more, being able to cover one’s payout is already considered impressive. The fact that Energy Transfer outearned its distributions by a sizable margin in the first quarter of 2020 was quite a feat.
The biggest concern now, of course, is how the company will do after the first quarter. The COVID-19 pandemic has made things very challenging for the energy industry, and commodity prices are quite volatile.
In Energy Transfer’s first-quarter earnings conference call, Chief Financial Officer Thomas Long said, “In light of the significant weakness in crude oil prices due to the COVID-19 demand destruction and additional OPEC supply, we are revising our 2020 adjusted EBITDA guidance range to $10.6 billion to $10.8 billion.” (Source: “Energy Transfer LP (ET) CEO Kelcy Warren on Q1 2020 Results – Earnings Call Transcript,” Seeking Alpha, May 12, 2020.)
Previously, ET’s outlook for adjusted EBITDA was $11.0 billion to $11.4 billion.
Bottom Line on Energy Transfer LP
At the end of the day, I wouldn’t call this high-yield stock a slam dunk.
Recently, a U.S. District court ordered Energy Transfer LP’s “Dakota Access Pipeline” to temporarily shut down during a court-ordered environmental review (although an appeals court set that ruling aside on July 14). (Source: “Dakota Access Pipeline Can Keep Running Amid Legal Fight: U.S. Court,” Reuters, July 14, 2020.)
The MLP is also about to report earnings.
Energy Transfer stock could face some uncertainties going forward, to say the least. Still, with a jaw-dropping yield and high insider ownership, ET stock deserves a spot on income investors’ watch lists.