Is Energy Transfer (ET) the Next Big Dividend Winner?

Leading midstream oil & gas company Energy Transfer LP (ET) has again gained traction among income-seeking investors for its high-yield dividend. The company's distribution yield currently tops 8%, which is well above the market’s 1.4% yield.

Moreover, the energy company has been a staple in a Congress member's portfolio for several years. In 2023, Representative Mark Green of Tennessee emerged as the second-best stock trader in Congress, boasting an impressive 122.2% return on investment.

Now, let's take a closer look at the company’s business operations, fundamentals, and how it supports its attractive distribution.

Recent Strategic Expansion Initiatives

Operating a vast network of approximately 125,000 miles of pipelines for the transportation of crude oil, natural gas, and natural gas liquids (NGLs), Energy Transfer demonstrates its robust and resilient business operations.

On March 27, 2024, Texas Rangers announced an extended partnership with ET, marking a multi-year agreement where the energy company will serve as the Rangers' official jersey patch partner. This move signifies a significant expansion of the company's brand visibility and community involvement.

ET co-CEO Mackie McCrea remarked, “Expanding our partnership to include the jersey patch creates an opportunity for us to show our support for the team while aligning our brand with Rangers fans throughout the Metroplex and across the country.”

On February 23, ET and Sunoco LP (SUN) joined forces to sponsor Sauber Motorsport’s Stake F1 Team KICK Sauber, marking their inaugural marketing partnership. The two-year agreement, starting from the 2024 season, grants sponsorship rights for three Formula 1 Grand Prix races in the U.S.

Also, in November 2023, Energy Transfer completed its previously announced merger with Crestwood Equity Partners LP, and integration of the combined operations is ongoing. The merger is expected to generate $80 million of annual cost synergies by 2026, with $65 million in 2024, before additional anticipated benefits from financial and commercial synergies.

What’s in Store for Income-oriented Investors?

ET is highly committed to returning value to shareholders via attractive dividends. On April 24, the company announced a quarterly cash distribution of $0.3175 per common unit ($1.27 on an annualized basis) for the first quarter, to be paid on May 20, 2024. The distribution per unit represents a 3.3% increase over the year-ago quarter.

Further, the company expects to grow its distribution by 3% to 5% annually. Energy Transfer’s current dividend translates to an 8% yield, while its four-year average dividend yield is 9.8%. Meanwhile, ET has raised its dividend payouts at a CAGR of 10.8% over the past three years.

Solid Fourth-Quarter 2023 Results and Upbeat 2024 Outlook

For the fourth quarter that ended December 31, 2023, ET’s revenues rose marginally year-over-year to $20.53 billion. Its operating income grew 19.9% year-over-year to $2.17 billion. Net income attributable to partners and net income per common unit came in at $1.33 billion and $0.37, up 14.9% and 8.8% from the prior-year quarter, respectively.

Furthermore, the energy company’s adjusted EBITDA increased 4.8% year-over-year to $3.60 billion. Also, its distributable cash flow attributable to partners amounted to $2.03 billion compared to $1.91 billion for the same period last year.

During the fourth quarter, Energy Transfer achieved significant milestones with the addition of new growth projects and acquisitions. The company's assets hit new records, with NGL fractionation volumes increasing by 16%. NGL transportation volumes also saw a notable surge of 10%. Additionally, NGL exports were up more than 13%, showcasing the company's expanding market reach.

Further, interstate natural gas transportation volumes witnessed a 5% growth, while midstream gathered volumes rose by the same margin. Crude oil transportation and terminal volumes were up 39% and 16%, respectively.

For the fiscal year 2024, ET anticipates its adjusted EBITDA to fall between $14.5 billion and $14.8 billion. The midpoint of this range indicates a 7% increase from last year’s adjusted EBITDA. Growth capital expenditures are estimated to range from $2.4 billion to $2.6 billion, including nearly $300 million of deferred spending from the previous 2023 capital guidance.

Energy Transfer will unveil its first-quarter results on May 8. For the quarter that ended March 2024, analysts expect the company’s EPS and revenue to increase 19% and 10.4% year-over-year to $0.38 and $20.97 billion, respectively. In addition, ET’s EPS and revenue for the fiscal year 2024 are expected to grow 44.1% and 9.1% from the prior year to $1.57 and $85.70 billion, respectively.

Bottom Line

ET’s business continues to thrive, propelled by consistent demand across its network and strategic acquisitions and partnerships. It benefits from a portfolio of assets with exceptional product and geographic diversity. Moreover, the energy company reported impressive fourth-quarter results, primarily driven by increased volumes across all core segments and the positive impact of its recent acquisition of Enable Midstream.

Moreover, ET announced an increase in quarterly cash dividend to $0.3175 per common unit for the first quarter of 2024. The company’s annual dividend reflects a lucrative yield of 8%. Energy Transfer targets a 3% to 5% annual distribution growth rate. The dividend increase reflects ET’s confidence in its financial health and growth prospects.

Further, the stock is modestly undervalued. ET’s forward non-GAAP price-to-earnings ratio of 10.17 is 7.5% lower than the industry average of 11. Also, its forward Price/Sales multiple of 0.62 compares to the industry average of 1.49.

Regarding price performance, the midstream giant’s shares have gained nearly 15% year-to-date and more than 25.1% over the past year. On top of it, RBC Capital analyst Elvira Scotto recently maintained a Buy rating on ET and set a price target of $19. Also, Mizuho Securities reiterated a Buy rating on the stock with a $19 price target.

Given ET’s promising expansion efforts, solid financial performance, and attractive dividend yield, we believe that this stock holds the potential to become the next big dividend winner. Hence, it could be an ideal buy for those principally focused on income.