Most investors tend to be conservative when putting investments in an IRA. That's because they don't want retirement-focused investments to be money losers. Not only could holding a rotten egg hurt an investor's ability to retire, but they can't even take the tax loss.
Given the desirability of owning an investment with a high probability of paying off over the long term, one stock to consider is Williams Companies (WMB -0.95%). That's because it should generate steadily growing cash flow for years to come thanks to its majority ownership interest in natural gas pipeline master limited partnership Williams Partners (NYSE: WPZ). Meanwhile, because of several smart strategic moves, Williams has vastly improved its balance sheet and growth prospects. These factors make it one stock investors shouldn't overlook when considering the next investment for their IRA.
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Williams Companies 101
Williams Companies' primary asset is its controlling interest in Williams Partners, which is one of the largest natural gas pipeline MLPs in America. More importantly, Williams Partners generates very consistent cash flow, with 97% of future cash flow expected to come from either regulated gas pipelines or other fee-based sources once it completes the sale of its stake in a petrochemical plant. That stability makes it increasingly likely that the company can maintain its lucrative distribution, which is Williams Companies' chief source of income. That solidifies Williams Companies' ability to maintain its generous dividend that currently yields 4%.
Another stabilizing force for Williams' dividend are the improving credit metrics of the combined company. After completing a financial repositioning transaction earlier this year, Williams Partners expects to improve its debt-to-EBITDA ratio to 4.5 times, while the consolidated leverage at Williams Companies should fall to around 5.25 times. That improving credit should grow stronger thanks to the recently announced petrochemical plant sale. In fact, at least one credit rating agency expects to upgrade Williams Partners' credit by two notches once it closes that transaction, which would give it one of the highest credit ratings among MLPs. There's also further improvement in the forecast given Williams' plan to pay down debt at the parent company level and growth projects the MLP has in the pipeline.
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What does the future hold for Williams Companies?
Williams Partners has worked so hard to shore up its financial situation because it has a few compelling growth projects under development that it needs to pay for. That's exactly what its recent strategic initiatives should accomplish because they have eliminated the company's need to obtain outside financing. One of the company's largest projects is the $7 billion multiyear expansion of the Transco natural gas pipeline system that runs along the East Coast. Overall, those projects should boost earnings by $1.15 billion annually when they enter service, which represents an excellent return on investment.
The growing cash flow stream positions Williams Partners to increase its distribution to investors by a 5% to 7% annual rate over the next several years. That growing distribution should fuel accelerated dividend growth at Williams Companies, which expects to increase its payout by 10% to 15% annually over the next few years while still generating excess cash to continue paying down debt.
In the meantime, Williams Partners is currently pursuing 20 additional expansion opportunities across its three major pipeline systems that should enable it to continue growing cash flow well into the future. Driving the need for those projects is accelerating natural gas demand in the U.S., which is expected to increase by 3.8% annually over the next five years after growing by 3.2% over the previous five. In addition to the already identified opportunities, Williams is in a prime position to land additional expansion projects due to the strategic location of its asset base in both the fastest-growing shale plays and rapidly expanding market centers.
Investor takeaway
As a result of several strategic initiatives over the past year, Williams Companies' finances are growing stronger by the day. Because of that, the company offers investors the type of stability they'd want to put in an IRA. Consequently, with a growing supply of expansion projects, investors should be rewarded with a rapidly rising income stream for several years to come. That's why IRA investors should take a closer look at this stock.
