Energy Transfer Partners: Dividend Dynamo or the Next Blowup?

Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.

Let's examine how Energy Transfer Partners (NYSE: ETP  ) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.

1. Yield
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.

Energy Transfer Partners yields 8.3%, considerably higher than the S&P's 1.9%. Normally this might be cause for concern, but it's normal for real estate investment trusts -- or REITs -- like Energy Transfer Partners to pay high dividend yields.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.

The payout ratio is somewhat less important when evaluating REITs because they are required to pay out a high percentage of their earnings in the form of dividends in order to avoid paying corporate income taxes. The company's distributable cash payout ratio, a related industry metric, stands at 71%.

3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The debt-to-equity ratio is a good measure of a company's total debt burden. We can also look at interest payments as a percentage of interest revenue for a quick way to gauge how comfortably these REITs can afford to make their interest payments.

Let's examine how Energy Transfer Partners stacks up next to its peers:

Company

Debt-to-Equity Ratio

Interest Coverage Ratio

Energy Transfer Partners

129%

3 times

Kinder Morgan Energy Partners (NYSE: KMP  )

157%

3 times

ONEOK Partners (NYSE: OKS  )

118%

3 times

Kinder Morgan (NYSE: KMI  )

176%

2 times

Source: Capital IQ, a division of Standard & Poor's.

Pipelines are a fairly capital-intensive but reliable industry, which explains why these companies are willing and able to carry fairly significant debt burdens.

4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

Over the past five years, Energy Transfer Partners' earnings per share have declined at an annual rate of 13%. Overall earnings actually increased, albeit slower than the share count. Its dividend per share has increased at a 7% rate.

The Foolish bottom line
Energy Transfer Partners has an excellent dividend yield, even for its peer group. Like other pipelines, the company carries a fairly significant debt burden, so earnings reliability is important. Dividend investors looking for dividend growth will want to keep an eye on the company's earnings-per-share growth to ensure that it's able to continue raising those big payouts.

To stay up-to-speed on the top news and analysis on Energy Transfer Partners or any other stock, add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

Ilan Moscovitz doesn't own shares of any companies mentioned. You can follow him on Twitter @TMFDada. Motley Fool newsletter services have recommended buying shares of ONEOK Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 24, 2011, at 2:30 PM, BIGGSPICKS wrote:

    There seems to be a huge misunderstanding here, ETP is not a REIT, it is a midstream MLP, (master limited partnership), and has absolutely nothing to do with the real estate market. It's basic function is providing pipelines, and storage facilities for enregy needs such as oil, nat'l gas, etc..

  • Report this Comment On August 24, 2011, at 3:03 PM, prginww wrote:

    BIGGSPICKS You are right on. I've been with this "MLP" and it's Predecessor, Heritage Propane for over 12 years and I've never been let down as always a better than average Dividend has been there supplementing my retirement.

  • Report this Comment On August 24, 2011, at 3:38 PM, busterbuddy wrote:

    So I've owned ETP and I on T. Let me give you my input. I started accumulating T in 2007 primarily looking at yield. I purchased from the 30s all the way down to 24. I noticed that during 2008 T raised its dividend while everyone thought the world was ending. At that point anytime T got below 25, I'd purchase. I've accumulated alot of capital and I've got an ok breakeven return but it took awhile. I'm happy with the decisions and I worry, now, everytime I buy that I"m accumulating to much. But now view is if T gives me above a 6% on new purchases I'm buying.

    So what, well I thought I'd do the same with ETP. Understanding I was again buy in High but decided the strategy I used for T might work again. But over the last year I've decided, no. Reasons,

    1. Earnings missings.

    2. Small Dividend increase that looks like it was just a teaser.

    3. The pipeline from Cushing to the Gulf looks dead.

    4. The purchase of Southern well while that might be good right now it looks like Williams is going to force them to possible pay more.

    So I looked around and said, "no and sold out my positions. I've taken a lose but I don't think it will matter in two or three years.

    So what did I do with the money from the Sale. I'm looking at EOG as my Bakken play and in my view if you want to invest in pipeline EEP or Kindermorgan are better.

    As for the yield of Master limited partnerships. I've had much better from flunx monthly Royaltiy trust like SBR and HGT.

    So that's my view.

  • Report this Comment On August 24, 2011, at 3:38 PM, prginww wrote:

    JUST TO LET YOU KNOW, This site says "no double usernames, integrity above all else, etc etc". The previous posted comment was made by me, I'm not "realtechwiz" if you lookup that username you will see many posts. I've only posted once before and the site assigned me some other username. It looks like they will let someone post without giving their personal info and registering, but they assign a username that does not usually reflect the poster's real opinions. Fool's Rules regarding integrity are like those of most Broker's Reps. not much integrity to be found anymore. I'm a 73 year old guy who has been there and had dealings with only a couple of men who believed in honest work for the investor First and Foremost.

  • Report this Comment On August 24, 2011, at 3:48 PM, bojangles31 wrote:

    The reason why the MLP yields jumped several months ago is that the government is eyeing a change in tax regulations targeting private equity earnings but that could spread into REITs and MLPs. It is likely that if they do continue to push this change through, REITs and MLPs, who are not the intended targets, will be exempted through the language of the revised taxation bill.

    It is very important to note that ETP is not purchasing Southern Union. The general partner owner of ETP, ETE, is buying Southern Union. Neither the price nor the resulting debt ETE will take on can effect ETP.

    The recent scrapping of the major pipeline JV to bring oil down from Cushing actually increases future cash flows, because that money won't be spent. At the same time the Haynesville expansion is complete and now online and they are expanding in other strong shale plays like the Eagle Ford shale.

    Not that all MLPs are the same, but if you have a diversified portfolio of assets/contracted flow and reasonable scale, yields shouldn't be too far apart. ETP's yield of 8.3% is higher than it's peers probably due to the misconception that it is buying Southern Union (which it is not). I think that this comes back into line with the other MLPs of similar size through capital appreciation, especially once the tax situation is sorted out. I am an owner and a comfortable owner based on the points above.

  • Report this Comment On August 25, 2011, at 10:11 AM, HunterChad wrote:

    Is anyone concerned that there is an article by a so called expert on here that is completely wrong about what industry a company is in. Maybe I shouldn't put much faith in any of these guys writing these articles?

  • Report this Comment On August 25, 2011, at 1:29 PM, BIGGSPICKS wrote:

    That was exactly the point I was trying to make, how can a so-called expert be so wrong about a company it's profiling. So much for accuracy I guess. I've always felt that the Motley Fool was a day late, in their analyisis anyhow, and this just throws more fuel on the fire . Somebody is asleep at the switch............

  • Report this Comment On August 28, 2011, at 12:31 PM, traintomonac wrote:

    One size fits all? The same headline was used in another article for Spectra as I recall. Every day another article needs to be written. So plug in another name and some new numbers and state the conclusions that the numbers suggest. Its all very mechanical.

    It used to really alarm me when an MLP was compared to a C-corp. But that was done on Seeking Alpha.

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