ONEOK's (OKE 2.25%) growth engine sputtered during the third quarter. While the energy company's cash flow rose about 2% year over year, earnings slipped less than 1%, mainly due to weakness in its natural gas liquids (NGLs) segment.
That slowdown, however, is just a temporary bump in the road, which was one of the clear takeaways from the company's third-quarter conference call. Overall, the company's management team pointed out five reasons why its growth rate will speed up heading into 2020. That upcoming acceleration should give the company plenty of fuel to keep growing its 5.2%-yielding dividend at an above-average rate.
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The five fuel sources for 2020
ONEOK's CEO Terry Spencer focused his comments during the call on the progress of the company's expansion program. He noted that the company finished up its Demicks Lake I natural gas processing plant in North Dakota in October, and that it expected to start up Demicks Lake II in January. Meanwhile, the company was on track to start filling the recently completed northern section of its Elk Creek NGL pipeline in November.
Those projects, however, are only the beginning. Spencer noted:
Between now and the end of the first quarter of 2020, we expect to fully complete five growth projects that will add more than 700,000 barrels per day of NGL transportation capacity, 125,000 barrels per day of fractionation capacity, and an additional 400 million cubic feet of natural gas processing capacity ... This critical natural gas and NGL infrastructure, including assets to help significantly reduce natural gas flaring in the Williston Basin, will provide immediate earnings and volume uplift in 2020, and stable fee-based growth for years to come.
As Spencer notes, ONEOK is on the cusp of completing a significant expansion of its midstream infrastructure that will drive substantial growth for the company in the coming year. In its estimation, these five projects will help fuel "greater than 20% earnings growth in 2020."
Plenty of fuel to deliver above-average dividend grow
The uptick in cash flow from those five projects will give ONEOK even more financial flexibility next year. It expects to use some of that incremental cash to pay down a portion of the debt it took on to fund its current expansion plan. CFO Walt Hulse stated on the call that the company wants to get its leverage ratio -- net debt to EBITDA -- from its current level of 4.5 to less than 4.0, which it expects to hit "in the fourth quarter of 2020 or the first quarter of 2021."
In addition, the company plans to continue growing its dividend. Hulse noted that ONEOK gave its investors another raise in November. "This latest increase results in a 9% increase in 2019 dividends paid, compared with 2018, in line with our previously stated guidance," he said. That outlook would see the company continue boosting its payout by 9% to 11% per year, through at least 2021.
That's well above the average growth rate for a company with such a high yield. ONEOK noted that it's just one of 26 companies in the S&P 500 with a dividend yield of more than 5%. However, its dividend growth rate is well above that of stocks in the S&P 500, which on average, are on track to grow their payout by about 6.7% per year over that time frame.
Set up for another strong year in 2020
With five expansion projects starting up by the early part of next year, ONEOK's earnings growth rate is on track to reaccelerate in 2020. That gives it plenty of fuel to start paying down debt as well as to keep increasing its dividend, and should enable the company to continue producing market-beating total returns. Those returns make it an excellent income stock to consider buying with 2020 in mind.
