Midstream energy company ONEOK (NYSE:OKE) has seen its stock advance by an incredible 180% since the start of 2016. Over that same time frame, the Alerian MLP ETF, which tracks a broad collection of ONEOK's midstream peers, has fallen 36%. After such large gains, investors are likely wondering two things: Why did ONEOK outperform, and is the investment story fully played out? Here's a quick look at ONEOK to help you figure out whether the midstream specialist and its 5.1% yield are worth adding to your portfolio today.

Why did ONEOK outperform?

After oil prices hit the skids in mid-2014, it looked like Wall Street didn't want anything to do with energy-related stocks. That included midstream companies, despite the fact that many of these businesses are largely fee-based. ONEOK, for example, gets around 85% of its revenue from fees today. However, that was just 66% in 2014. So there was a reason for investors to be a little negative here a few years ago, but more positive today. 

An oil pipeline with a man welding

Image source: Getty Images.

That said, there was a lot going on over the last three years or so at ONEOK. For example, the company's leverage had started to rise going into 2014 and then spiked in 2015, with debt to EBITDA nearly doubling to a bit more than 6 times in just a few years. With energy prices weak, that rightly spooked investors increasingly concerned with financial safety as the energy sector struggled. 

When oil prices started to turn higher in early 2016, however, ONEOK's leverage started to come down. Then, in 2017, the company chose to simplify its business by acquiring its controlled master limited partnership (MLP). Impressively, ONEOK managed to get that deal done while continuing to grow its dividend, investing in its business (increasing its fee-based revenue), and further reducing its leverage. Notably, adjusted EBITDA went from $1.55 billion in 2014 to $2.45 billion in 2018. The purchase of its controlled MLP is notable because it increases the pool of investors who can buy ONEOK, since some institutional investors can't buy MLPs. All in, there are plenty of reasons for investor sentiment toward ONEOK to have turned more positive.     

At this point, however, ONEOK's stock is up massively since oil prices bounced off their lows. Major midstream energy peers haven't joined in that rally, with industry bellwethers Enterprise Products Partners (NYSE:EPD) and Kinder Morgan (NYSE:KMI) up about 1% and 28%, respectively, since early 2016. Kinder Morgan is an interesting comparison here, because the company cut its dividend in 2016 but has since returned to dividend growth in a big way. Kinder's dividend cut notably came after it bought its controlled MLP. ONEOK, however, managed to do the same while continuing to grow its dividend at an average annual rate of 20% over the past five years, setting it apart from this peer. Enterprise, which is still structured as an MLP, has a long history of growing its distribution at an annual clip of roughly 5% -- nice, but nowhere near close to ONEOK's dividend growth rate. One of the biggest difference between ONEOK and some of the biggest names in the midstream space appears to be sizable and consistent dividend growth and investors have taken notice. 

Is the investment story played out?

Which is why it makes sense to ask if the good news at ONEOK is strong enough to justify a purchase today. The thing is, there's still notable growth ahead. For example, the midstream company has a number of projects coming on line in early 2020 that it projects will boost adjusted EBITDA by as much as 20% over 2019 levels. It has another $1.7 billion or so worth of projects set to come on line in 2021 that should support growth beyond 2020. 

As these plans play out, meanwhile, the company will likely continue to increase its dividend at a rapid clip. That's just par for the course for ONEOK, which has a 17-year streak of annual dividend increases under its belt and, as noted above, has been making big annual hikes, on average (over the past decade the annualized increase came in at 17%). With dividends covered by 1.4 times through the first nine months of 2019, and a sizable jump in adjusted EBITDA expected for 2020, it looks like there's plenty of room for more big dividend boosts in the near future. 

For comparison, Kinder Morgan's latest dividend increases are large but coming off of a 75% cut in 2016. Enterprise Products Partners' distributions have grown for 22 years, but historically growth has been in the mid-single digits. Dividend investors looking for a mix of yield and dividend growth should clearly find a lot to like in ONEOK, even after the stock's big run-up. 

OKE EV to EBITDA (TTM) Chart

OKE EV to EBITDA (TTM) data by YCharts.

To be fair, ONEOK is being priced at a premium today. For example, its enterprise value-to-EBITDA ratio is around 16, while Kinder Morgan and Enterprise are both near 11. This difference isn't surprising given ONEOK's huge stock price advance, but it is something that investors have to take into consideration. If you are looking for a value play in the midstream space, ONEOK probably isn't a good fit for you. But at the same time, the company's recent performance and future growth prospects appear to justify that premium if dividend growth is your goal. 

To buy or not to buy

Stepping back and looking at the big picture, ONEOK appears to be a fairly desirable investment option today for dividend growth investors. Yes, the stock has risen dramatically over the last few years, but the yield is still very generous and it looks like ONEOK will be able to keep increasing the payment over the next couple of years. Although value-focused dividend investors probably won't like what they see, most others should strongly consider putting ONEOK on their buy list.