Energy Transfer (NYSE: ET) is giving its investors another raise. The master limited partnership (MLP) is increasing its quarterly cash distribution to $0.325 per unit, or $1.30 annualized. That's up from last quarter's level of $0.3225 per unit, or $1.29 annualized, and 3.2% higher than the year-ago payment. This latest increase pushes its yield above 6.3%, which is several times higher than the S&P 500's 1.2% dividend yield.
The midstream giant's high-yielding payout should continue to head higher in the future. That makes it a great income stock for those comfortable with investing in an MLP that sends its investors a Schedule K-1 Federal Tax Form each year.
Energy Transfer can easily afford its distribution. The MLP produces about $8.5 billion of distributable cash flow each year. Its cash flow is very stable, with 90% of its earnings coming from predictable fee-based sources. The current cash flow level easily covers its distribution outlay, which is around $4.5 billion. This payout level allows it to retain about $4 billion each year to invest in growth projects, totaling $2.5 billion to $3.5 billion per year, and for discretionary opportunities such as debt repayment, acquisitions, and unit repurchases.
The MLP also has a solid balance sheet. It expects its leverage ratio will be in the lower half of its 4.0-to-4.5 target range this year. That supports its investment-grade credit ratings. With its leverage ratio trending down toward the lower end of its target range, Energy Transfer will have more financial flexibility to make accretive acquisitions or repurchase units in the future.
Energy Transfer's strong financial profile puts its high-yielding distribution on a sustainable foundation.
Energy Transfer is investing heavily in expanding its midstream footprint. The MLP planned to spend $2.8 billion to $3 billion last year on capital projects, which included funding projects it completed last year and those on track to enter service over the next couple of years. The biggest project is the recently approved $2.7 billion Hugh Brinson Pipeline, which it expects to complete by the end of 2026. These projects will supply it with incremental cash flow as they come online to support continued distribution increases.
In addition, the midstream company has several more expansion projects under development. The most notable is Lake Charles LNG. The company recently added Chevron as a customer, bringing it closer to approving this long-delayed LNG export terminal. Energy Transfer is also working on a large-scale offshore oil export facility, carbon capture and sequestration projects, blue ammonia hubs, and other expansion opportunities. Securing these and other growth projects would enhance and extend the company's growth outlook.
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Energy Transfer also has ample financial flexibility to continue making accretive acquisitions that enhance its growth. For example, it bought WTG Midstream in a nearly $3.1 billion deal last year. That acquisition will add $0.04 per share to its distributable cash flow this year, increasing to $0.07 by 2027. The company has a long history as a consolidator in the midstream sector. It's always on the hunt for acquisitions that enhance its operations and increase its cash flow per share without having a negative impact on its balance sheet.
Energy Transfer produces lots of stable cash flow. That gives it the money to pay a lucrative distribution while also investing in expanding its operations. Those growth-focused investments increase its cash flow, allowing the MLP to steadily raise its distribution payment. With a lot more growth ahead, Energy Transfer is an excellent option for investors seeking an attractive and steadily rising income stream.
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Matt DiLallo has positions in Chevron and Energy Transfer. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
Energy Transfer Continues to Steadily Put More Cash into Its Investors' Pockets was originally published by The Motley Fool
