Williams Companies Inc: Natural Gas Pipeline Giant With Safe 6.7% Dividend
WMB Stock Shrugs Off 2020 Headwinds
Williams Companies Inc (NYSE:WMB) is a natural gas infrastructure behemoth that quickly overcame all of the headwinds that will forever be associated with 2020. This includes the COVID-19 global pandemic, collapse in oil prices, depressed natural gas liquid (NGL) demand, an active hurricane season in the Gulf of Mexico, and major customer bankruptcies.
Since the broader stock market bottomed in March 2020, Williams Companies stock has soared by 122%. WMB stock is also up approximately 36% year-over-year and 25% year-to-date.
Why the bullish sentiment? Williams Companies has shifted its strategy over the last number of years to focus on natural gas. That has put the company in a better position than most of its midstream peers when energy markets become volatile, which is exactly what happened in 2020. (Source: “Scotia Howard Weil Energy Conference,” Williams Companies Inc, March 23, 2021.)
Chart courtesy of StockCharts.com
Before continuing, I need to back up a little.
In 2018, Williams Companies completed the acquisition of Williams Partners L.P. and its merger with a subsidiary of Williams. This transaction helped streamline and simplify the corporate structure, improved its financial position, and lowered its cost of capital. The deal resulted in the company getting nearly half of its earnings and cash flow from rate-regulated gas pipelines.
Because it has been able to rely on fee-based, long-term contracted revenue and an enviable national infrastructure, Williams Companies has been able to deliver steady performance through turbulent market conditions over the last two years.
And its large-scale natural gas infrastructure truly is second to none. With more than 30,000 miles of pipelines, Williams Companies Inc handles 30% of the country’s natural gas. The company directly serves 600 customers, through which it indirectly serves over 35 million energy consumers.
The company’s Transco pipeline is the largest and fastest-growing major pipeline in the U.S. Through its 10,000-mile interstate transmission system, Transco moves gas between the Gulf of Mexico and the Northeast. On the supply side, it capitalizes on the surge in production in the Appalachian region. On the demand side, Transco benefits from LNG exports, gas power generation, increased industrial gas demand, and lower levels of ethane rejection.
Williams Companies Inc’s massive, unique, and growing infrastructure has allowed it to deliver reliable earnings and a healthy balance sheet. It has met or exceeded guidance expectations for all key metrics from 2017 to 2020.
The company has reported:
- Discretionary free cash flow (FCF) generation in 2020 and 2021
- 20 consecutive quarters of meeting or beating consensus earnings before interest, taxes, depreciation, and amortization (EBITDA) estimates
- Eight consecutive years of annual adjusted EBITDA growth
- Adjusted earnings per share (EPS) that expanded at a compound annual growth rate (CAGR) of 12% from 2018 ($0.79) to 2021 ($1.11)
- Adjusted funds from operations (FFO) that increased steadily from $2.9 billion in 2018 to $3.7 billion in 2021
All of that has helped Williams Companies provide investors with impressive dividends. From 2017 to 2021, the company’s quarterly dividend increased by 36%, from $0.30 to $0.41 per share. (Source: “Dividend History,” Williams Companies Inc, last accessed May 3, 2021.)
Williams Companies stock currently pays an annual dividend of $1.64 per share, which works out to a 6.7% yield. The dividend coverage ratio, which measures the number of times a company can pay its current dividend, is 1.9. A healthy dividend coverage ratio above 2.0 is ideal. Anything below 1.5 raises eyebrows.
And Williams has a history of paying out high dividends, which suggests the company wants to continue doing so. WMB stock’s trailing annual dividend yield is 6.6% and its five-year average dividend yield is 6.3%.
As you can see in the following chart, the company even raised its dividend in 2020, a year racked by COVID-19, collapsed oil prices, and depressed NGL prices. Williams Companies raised its dividend again in 2021.
Amount Per Share
Williams Companies was able to raise its dividend in 2020 because of its exceptional performance.
Again, in spite of all the economic, medical, and industry headwinds in 2020, Williams Companies reported all-time record results and surpassed the guidance midpoints in all of its key financial metrics.
For full-year 2020, the company reported:
- Record adjusted EBITDA of $5.1 billion
- Record discounted cash flow of $3.4 billion
- Adjusted EPS of $1.10, up by 11% from 2019
- Adjusted FFO of $3.6 billion, up by one percent from 2019
- A debt-to-adjusted EBITDA ratio that was reduced to 4.4
- FCF of $212.0 million
- An operating margin that improved for the sixth consecutive year
- Record gathering volumes of 13.2 billion cubic feet per day (Bcf/d)
- Record transmission contracted capacity of 22.2 Bcf/d
(Source: “Williams Reports Fourth-Quarter and Full-Year 2020 Financial Results,” Williams Companies Inc, February 22, 2021.)
Commenting on the record results, Alan Armstrong, president and CEO, noted, “Our production supplies in the Northeast and along the Gulf Coast as well as our network of interconnections with other pipelines and strategic storage reserves ensured we were able to meet our commitments and deliver scheduled supplies with no issue.” (Source: Ibid.)
The Lowdown on Williams Companies Inc
A leading natural gas pipeline company, Williams Companies Inc overcame obstacles in 2020 that left many energy companies in the dust. In spite of numerous headwinds, the company reported record results for 2020, surpassing the guidance midpoints in its key financial metrics and generating positive free cash flow.
Looking forward, Williams expects strong natural gas market fundamentals to drive continued growth in 2021. Moreover, after several years of structural and financial moves, Williams Companies stock is positioned to maintain steady dividend growth for the foreseeable future.