Is The Williams Companies (WMB) a Durable Dividend Stock to Buy?

The Williams Companies, Inc. (WMB), a leading energy infrastructure company, has been a reliable dividend stock over the years. The company has paid a common stock dividend every quarter since 1974 and has increased its payout in most years. The company’s dividend payments have grown at a CAGR of 6% since 2018.

The natural gas pipeline company currently offers an impressive 5.1% dividend yield, placing it toward the top end of dividend payers in the S&P 500 index, with an average yield of around 1.5%.

On October 24, WMB’s Board of Directors approved a regular dividend of $0.4475 per share or $1.79 annually, on the company’s common stock, payable on December 26, to stockholders of record at the close of business on December 8. This represents an increase of 5.3% from its fourth-quarter 2022 quarterly dividend of $0.425 per share.

Now, let’s discuss several factors that could impact WMB’s performance in the near term:

Mixed Financial Performance

The pipeline giant reported third-quarter 2023 adjusted EPS of $0.45, beating the analysts’ estimate of $0.41. However, this compared to the adjusted EPS of $0.48 in the prior year’s quarter. The decline in the bottom year was due to lower-than-expected contributions from two major segments - West & Gas and NGL Marketing Services.

Also, WMB’s adjusted net income came in at $547 million, down 7.6% from the same quarter of 2022. But year-to-date adjusted net income grew by $171 million over the previous year to $1.75 billion.

The company’s third-quarter 2023 Available Funds from Operations (AFFO) declined slightly by $11 million from the year-ago value to $1.23 billion, primarily due to lower distributions from certain equity method investments partially offset by higher operating results excluding noncash items. However, its year-to-date 2023 AFFO increased by 9.2% year-over-year to $3.89 billion.

William’s dividend coverage ratio for the third quarter was 2.26x (AFFO basis), compared to 2.40x in the same period in 2022. Its year-to-date 2023 dividend coverage ratio was 2.38x versus $2.29x over the prior year.

WMB’s third-quarter adjusted EBITDA grew marginally year-over-year to $1.65 billion, driven by the previously described higher services revenues, partially offset by lower upstream results, reduced marketing margins, increased operating costs, and lower JV proportional EBITDA. Year-to-date 2023 adjusted EBITDA rose by $414 million over the prior year to total $5.06 billion.

Further, the company’s quarterly revenue came in at $2.56 billion, missing the consensus estimate of $2.59 billion, mainly due to lower product sales. The top line also declined from the year-ago value of $3.02 billion.

As of July 30, 2023, the natural gas pipeline company’s cash and cash equivalents stood at $2.07 billion, compared to $152 million as of December 31, 2022. Its current assets came in at $4.26 billion versus $3.80 billion as of December 31, 2022.

2023 Financial Guidance

WMB raised its midpoint of guidance and now expects full-year adjusted EBITDA between $6.60 billion and $6.80 billion. Its growth capex guidance remains unchanged, between $1.60 billion to $1.90 billion. Also, Williams expects a leverage ratio midpoint of 3.65x, allowing the company to retain financial flexibility.

Optimizing Portfolio Through Divestments and Re-Investing in Assets Strategic to Footprint

During the third quarter of 2023, WMB sold its Bayou Ethane system for $348 million in cash, representing a last-12-month multiple over 14x adjusted EBITDA. The transaction comprises long-term ethane takeaway agreements, locking in flow assurance for Discovery and Mobile Bay producers.

The proceeds from the sale of Bayou will contribute to funding the company’s extensive portfolio of attractive growth capital investments, including transactions in Colorado’s Denver-Julesburg (DJ) Basin. Williams announced an acquisition of Cureton Front Range LLC, a Denver-based, growth-oriented midstream company focused on offering creative and transparent commercial solutions to oil & gas producers in the DJ Basin.

Cureton’s asset base consists of more than 260 miles of low- and high-pressure pipelines, 109 MMcf/d of natural gas processing capacity, 64,000 horsepower of compression, and has long-term contracts with blue-chip operators covering over 200,000 dedicated acres and two million acres of AMIs.

In addition, WMB agreed to purchase KKR’s 50% ownership interest in Rocky Mountain Midstream, resulting in 100% ownership of Rocky Mountain Midstream for the company.

These strategic acquisitions have a combined value of $1.27 billion, representing a multiple of nearly 7x expected 2024 adjusted EBITDA. Further, these two assets will boost purchase multiple through increased volumes on existing processing facilities and downstream NGL transportation, fractionation, and storage assets.

These transactions are anticipated to close by the end of this year, making WMB the third-largest gatherer in the DJ Basin and staying committed to the company’s strategy of maintaining top positions in its areas of operation.

Deals and Expansion Projects

On August 3, WMB announced the execution of an agreement with Chattanooga Gas, a subsidiary of Southern Company Gas, to provide certified, low-emissions NextGen Gas over a period of three years.

Through its Sequent Energy Management business, Williams has built a marketing platform to sell trusted low-carbon and net-zero NextGen Gas to utilities, LNG export facilities, and other clean energy users with the goal of helping customers meet their climate commitments.

WMB deploys its NextGen Gas platform across its vast infrastructure network, leveraging blockchain-secured technology to track and measure emissions via the aggregation and reconciliation of several sources of data to offer a path-specific methane intensity certification.

Debt Burden

On August 8, Williams priced a public offering of $350 million of its 5.4% senior notes due 2026 (the new 2026 notes) at a price of 100.181% of par and $900 million of its 5.3% senior notes due 2028 at a price of 99.886% of par.

The new 2026 notes are an additional issuance of WMB’s 5.4% senior notes due 2026 issued on March 2, 2023, and will trade interchangeably with the $750 million aggregate principal amount of such notes outstanding, resulting in $1.1 billion aggregate principal amount of such notes outstanding.

As of September 30, 2023, the company’s total current liabilities came in at $5.53 billion, compared to $4.89 billion as of December 31, 2022.

Impressive Historical Growth

WMB’s revenue and EBITDA have grown at respective CAGRs of 10% and 14% over the past three years. The company’s net income has increased at a CAGR of 131.3% over the same timeframe, while its EPS has grown at a 131.6% CAGR. In addition, its total assets and levered free cash flow have improved at CAGRs of 4.7% and 18.3%, respectively.

Disappointing Analyst Estimates

Analysts expect WMB’s revenue to decline 12.2% year-over-year to $2.57 billion for the fourth quarter ending December 2023. The company’s EPS for the current quarter is expected to decrease 12.4% year-over-year to $0.46. Moreover, Williams missed the consensus revenue estimates in three of the trailing four quarters.

Furthermore, Street expects WMB’s revenue and EPS for the fiscal year 2023 to decline 2.7% and increase 5% year-over-year to $10.67 billion and $1.91, respectively. For the fiscal year 2024, the company’s revenue and EPS are estimated to grow 1.5% and decrease 1.4% from the previous year to $10.83 billion and $1.88, respectively.

Bottom Line

While WMB’s fiscal 2023 third-quarter earnings surpassed analysts’ expectations, its revenue missed estimates. Despite reporting top-and-bottom-line declines from the prior year’s period, the company continues to have an upbeat full-year 2023 financial guidance.

However, analysts appear bearish about the natural gas pipeline company’s near-term prospects. Declining earnings and mounting debt could result in cuts to its now attractive dividend.

Given its bleak financials and disappointing short-term outlook, waiting for a better entry point in this stock could be wise.


Is Williams Cos. (WMB) the Ultimate Long-Term Energy Stock Buy for Investors?

Natural gas company The Williams Companies, Inc. (WMB) , boasting a market cap of over $43 billion, recently outperformed third-quarter estimates, driven by increasing revenues generated from its midstream business.

The inherent qualities of the midstream business model mean that oil and gas pipeline transportation and storage activities are relatively shielded from fluctuations in commodity pricing. WMB generates profit when customers utilize its infrastructure under fee-based and non-cash commodity contracts within its gathering business. To counterbalance specific commodity price risks, the company employs hedging strategies.

Notably, 80% of WMB's customer base are investment-grade companies, which reduces the risk of financial instability during adverse economic climates. Additionally, utilities and power entities constitute 68% of its clientele, further bolstering its low-risk profile.

WMB operates as a crucial intermediary connecting energy producers to consumers, thereby reaping benefits from the surging demand for energy infrastructure and the transition to more environment-friendly energy sources, including natural gas.

The company is proactively contributing to the clean energy transition with heightened efforts toward developing clean hydrogen commercially. WMB asserts that natural gas is pivotal in satiating the escalating energy demands and concurrently reducing pollutant emissions. The Biden administration's support of Mountain Valley Pipeline completion highlights the critical need for robust natural gas infrastructure.

Pipeline operators like WMB stand to gain considerably when natural gas demand surges, enabling these companies to capitalize on service revenue, which makes up most of their sales. With the potential rise in natural gas demand , WMB's commitment to leveraging its expansive natural gas infrastructure for sustainable growth could be lucrative.

WMB continues to uphold its broad operational reach, which extends across 14 strategically vital supply areas. As an energy infrastructure titan, WMB forecasts considerable future growth. In recent developments, the pipeline giant has committed to several acquisitions and authorized additional expansion initiatives, effectively extending its visible growth trajectory through the upcoming years. Moreover, further projects are underway.

Transco's Regional Energy Access project was concluded ahead of the anticipated timeline, with full-rate revenues to commence in late October. It is expected that the signing of the precedent agreements for the Southeast Supply Enhancement project is likely to boost EBITDA.

Bayou Ethane Pipeline system was sold for $348 million in cash, or over 14 times the adjusted EBITDA. The subsequent revenue was allocated toward procuring Cureton Front Range and its joint venture partner's 50% interest in Rocky Mountain Midstream, resulting in complete ownership by WMB. A total of $1.27 billion was spent on these acquisitions, equating to roughly 7x the adjusted EBITDA.

Over the next year, as the new assets are amalgamated into the existing portfolio, the acquisitions are projected to boost the company's cash flow and streamline regional operations.

WMB extends an appealing proposition for investors seeking both growth and steady income. It exhibits a firm growth track, with its net income growing at a 5.2% CAGR over the past five years. The natural gas pipeline giant delivers an impressive 5.1% dividend yield on the current share price, catering to income-driven investors.

The growth has enabled WMB’s dividend to grow at a 6% CAGR over the same period. The solid mix of its consistent dividend income and steadfast growth could generate considerable returns in the forthcoming years.

But what’s driving this growth?

For the nine months that ended September 30, 2023, the company reported generating over $5 billion EBITDA, reflecting an 8.9% year-over-year increase despite the declining natural gas prices. Consequently, the pipeline company is on course to yield $6.7 billion of adjusted EBITDA this year, surpassing its previous guidance range by $100 million.

Further strengthening its financial health, WMB’s Available Funds from Operations (AFFO) have marked a 9.2% year-over-year surge to $3.89 billion. This rise has sufficiently cushioned the firm's cash reserves to cover its dividend by 2.38 times, presenting a 3.9% improvement from the year-ago period, even after incorporating its 5.3% dividend increase this year.

The key propellants stimulating this growth are multi-faceted, encapsulating the robust performance of its underlying business, the fruition of recently finalized expansion projects, and strategic acquisitions.
WMB has an impressive record of paying dividends to its shareholders for 33 consecutive years, growing it for five consecutive years. Given its financial strength, the company is unlikely to cut its dividend in the future. The dividend in 2023 was increased to $1.79 from $1.70 in 2022.

Bottom Line

WMB is projected to sustain steady growth in the upcoming years. Enhanced by recent acquisitions of organic expansion projects and strategic transactions, the company solidifies its already strong growth prospects. These secured projects are expected to fuel an annual earnings growth of 5% to 7%.

The company's commitment to natural gas infrastructure illustrates a comprehensive strategy that recognizes the evolving energy landscape and underscores dedication to sustainability, reliability, and substantial growth. This approach has thus far proven beneficial for the business, demonstrated by its assets that grew at a 6.7% CAGR over the past 10 years.

Strong natural gas demand could significantly boost the company, given the increasing need for electricity generation . Consequently, WMB may encounter heightened demand, offering the potential for significant cash flow returns to shareholders and a robust dividend yield.

WMB's capabilities to deliver cash flows for investors and enhance dividends should be prioritized. Maintaining the company's leverage ratio within a reasonable range will facilitate this sustainability.

A positive development was marked by a dip in WMB’s debt-to-adjusted EBITDA to 3.45x from 3.68x in the year-ago quarter. The strong capital cushion amid high-interest rates could serve them well in the future and boost the share price.

Shareholders are set to benefit from an impressive growth backlog, including completing seven out of nine significant pipeline projects scheduled for the fourth quarter of 2024.

Though dividends may serve as a luring feature when purchasing shares, the existing yield of 5.1% presented by WMB may dishearten investors, given that comparable superior-quality stocks within the sector provide more substantial yields. Even though WMB has capitalized on prevailing industry trends, prospective long-term investors may be inclined towards alternatives boasting greater returns.

Wall Street analysts expect the stock to reach $38.82 in the next 12 months, indicating a potential upside of 10.5% upside of 10.5%. Should there be no change in the dividend rate, falling dividend yields could be expected.

WMB’s robust financial stability, risk-averse customer base, and sustained growth in dividends make it an attractive option for income-oriented investors. Considering its 6% rally in the stock witnessed so far, the dividend yield is not particularly enthusing – especially considering that WMB's contemporaries also boast comparable growth potential.

A possible correction in the future could potentially optimize the risk-reward balance. On these grounds, it would be wise to wait for a better entry point in the stock.