ONEOK (NYSE:OKE) is in the midst of a building boom. The pipeline giant has a growing list of midstream infrastructure projects under construction that are beginning to come online. As that happens, the company's earnings growth rate will accelerate.
The company's upcoming acceleration was a key theme on its recent second-quarter conference call. Here's why ONEOK's management is so excited about the future, which bodes well for its high-yielding dividend.
We can see the finish line
ONEOK CEO Terry Spencer led off the call:
It's an exciting time for ONEOK as we begin placing some of the largest capital growth projects in our history into service. Our projects remain on or ahead of schedule and on budget. The southern section of the Elk Creek pipeline began flowing NGLs on July 15 from the Rockies region into the Mid-Continent with the northern section still on target to be completed in the fourth quarter.
As Spencer points out, ONEOK has just started placing some of its large-scale expansion projects into service, led by the first phase of its Elk Creek Pipeline. That it's on track with both its budget and schedule is noteworthy, given the issues other pipeline companies have had with finishing projects in recent years.
Because of the company's construction progress and strong financial results so far, Spencer stated: "Our confidence in our 2019 financial expectations and 2020 earnings outlook has strengthened significantly. With our projects remaining on or ahead of schedule, we expect accelerated earnings growth leading into 2020 and beyond and additional cash flow to reinvest in our business, reduce leverage and continue to return value to shareholders."
For 2019, ONEOK currently expects its earnings to grow by about 7% at the midpoint of its guidance range. In 2020, the company anticipates that its growth rate should accelerate to "greater than 20%" according to CFO Walt Hulse, "with an emphasis on the greater than when compared with our 2019 guidance midpoint." That surge in cash flow will give the company the flexibility to do lots of things, including continuing to grow the dividend.
More dividend growth seems likely
ONEOK is currently in the peak spending year of its expansion program. The company anticipates that it will invest toward the higher end of its $2.5 billion to $3.7 billion capital budget range. While it recently added a few more expansion projects to its backlog, "we expect capital expenditures in 2020 to be lower than 2019," according to Hulse. Combine that lower spending with the expected uptick in cash flow, and ONEOK will have even more financial capacity to support dividend growth.
The company already generates enough cash to cover its 5.1%-yielding payout by a comfortable 1.5 times. That allowed it to boost the dividend by another 3% during the second quarter, pushing it up about 8% in the past year and marking the seventh straight quarterly increase.
Hulse said this latest "increase further underscores our confidence in the increasing cash flow we expect to generate from projects we have recently completed or will complete in the coming months." It's a trend that should continue in the coming quarters as the acceleration in the company's cash flow takes hold. Given its increasing financial flexibility, ONEOK may grow its dividend at an even faster rate over the next couple of years.
A great stock for income-seekers
ONEOK has taken advantage of the industry's need for new midstream infrastructure to lock-up several needle-moving projects in recent years. With those expansions starting to come online, the company's cash flow is on pace to surge in the coming year. That upcoming uptick increases the likelihood that ONEOK can continue boosting its already attractive dividend. This growing income stream makes it such an excellent stock for retirees to consider buying.