Williams (WMB -0.48%) offers investors the best of both worlds. The natural gas pipeline company provides an attractive income stream via its 5.1%-yielding dividend. It also delivers growth. It has grown its earnings at a 7% compound annual rate over the last five years. That has given it the fuel to increase its dividend by about 6% annually during that time.
Williams has more growth ahead. The pipeline company recently made a couple of acquisitions and sanctioned some more expansion projects, extending its visible growth runway through 2028. Meanwhile, it has more projects in the pipeline. Williams' combination of growth and dividend income could give it the fuel to generate strong total returns over the next several years.
A trio of fuel sources are driving growth
Williams has generated over $5 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) through the first nine months of this year. That's up 9% compared to the same period last year, even though natural gas prices are much lower. That has the pipeline company on track to produce $6.7 billion of adjusted EBITDA this year, $100 million ahead of its prior guidance range.
Meanwhile, its available funds from operations (FFO) have increased 9% to almost $3.9 billion. That supplied the company with enough cash to cover its dividend by 2.38 times. That's a 4% improvement from the year-ago period after factoring in the company's 5.3% dividend increase this year.
Fueling that growth is the strong underlying performance of its base business, recently completed expansion projects, and acquisitions. The company has completed the NorTex Wolf Hollow, South Mansfield, and Northeast Cardinal Utica phase one expansions this year. Meanwhile, it recently placed phase one of Transco's Regional Energy Access expansion into service. The pipeline company has also benefited from the acquisitions of NorTex Midstream, MountainWest, and Trace Midstream.
Adding a lot more fuel to its growth engine
Williams should continue growing at a healthy clip for the next several years. The company enhanced its already solid growth prospects by recently securing a couple more organic expansion projects and completing several strategic transactions.
The company is fine-tuning its portfolio by selling a non-core asset and recycling that capital into two acquisitions that will optimize its position in the DJ Basin. Williams agreed to sell its Bayou Ethane system for $348 million, or over 14 times adjusted EBITDA. It's using that cash (and its strong investment-grade balance sheet) to help fund the acquisitions of Cureton Front Range and its joint venture partner's 50% interest in Rocky Mountain Midstream, giving it 100% ownership of that entity. It's paying a combined $1.3 billion or about 7 times adjusted EBITDA. Those acquisitions will provide a meaningful uplift to its cash flow over the next year as it integrates them with its existing assets to optimize its operations in the region.
Williams also signed enough customer agreements to proceed with its MountainWest Uinta Basin expansion project and Transco's Southeast Supply Enhancement. That latter project extends its growth outlook through 2028:
Image source: Williams.
As that slide shows, Williams' secured organic expansion projects should drive 5% to 7% annual earnings growth over the next several years.
Meanwhile, the company has more growth projects in the pipeline. It has several more natural gas pipeline expansions and related infrastructure projects in development.
In addition, it's pursuing emerging lower carbon investment opportunities like carbon capture and hydrogen. The U.S. Department of Energy recently selected the Pacific Northwest Hydrogen and Appalachian Regional Clean Hydrogen Hubs for investment and development. Williams is one of the partners working to develop those two hubs. Williams plans to build hydrogen pipelines to support the Pacific Northwest Hydrogen Hub while leveraging its footprint and partnership opportunities to support the Appalachian Clean Hydrogen Hub. These proposed projects could extend its growth outlook well past 2028.
Income and growth
Willams' investments to grow its operations continue to pay dividends. The pipeline giant's earnings are rising steadily as it completes new expansion projects and bolt-on acquisitions. It recently completed a couple more acquisitions and secured two more expansion projects, the latter of which will extend its growth outlook through 2028. That should give Willaims the fuel to continue increasing its dividend. With a 5% yield and earnings growth of 5% to 7% per year, Williams could produce total returns of 10% to 12% annually, making it look like an attractive long-term investment opportunity.
