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This 7.1%-Yielding Pipeline Stock Continues to Post Impressive Results

By Matthew DiLallo – Feb 22, 2020 at 10:40AM

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Williams Companies' fourth-quarter and full-year numbers show that its high-yielding payout is on rock-solid ground.

Williams Companies (WMB -1.14%) ended 2019 on a high note as the volume of natural gas traveling across its pipeline systems continued to grow, enabling it to produce record earnings and cash flow. The pipeline giant easily covered its high-yielding dividend.

While some headwinds will slow it down this year, the company's big-time payout is on an increasingly firmer foundation.

Drilling down into Williams Companies' fourth-quarter results

Metric

Q4 2019

Q4 2018

Change

Adjusted EBITDA

$1.284 billion

$1.197 billion

7.3%

Distributable cash flow (DCF)

$828 million

$748 million

10.7%

Dividend coverage ratio

1.8 times

1.82 times

(1.1%)

Data source: Williams Companies.

Williams Companies' earnings rose 7% during the fourth quarter, pushing its full-year total to a record of $5.02 billion. That was 8% higher than 2018's level and right above the midpoint of its $4.85 billion to $5.15 billion guidance range despite the impact of several asset sales.

DCF, meanwhile, grew nearly 11% during the fourth quarter, driving its full-year tally to almost $3.3 billion, which was also a record level for the company. That was 15% above 2018's tally and right at the tip-top of its $2.9 billion to $3.3 billion guidance range. The company produced enough cash to cover its dividend -- which it increased by 11.8% during the year -- by an ultra-comfortable 1.79 times.

Fueling Williams' solid finish was the strength of two of its three business units:

Williams Companies earnings by segment in the fourth quarter of 2019 and 2018.

Data source: Williams Companies

Williams' Northeast gathering and processing (G&P) business led the way as earnings surged 24% year over year. The segment benefited from increased service revenue on several of its systems, as well as the acquisition of Utica East Ohio Midstream.

Earnings in the Atlantic-Gulf segment rose about 8% during the fourth quarter. Behind that growth were higher rates and expansion projects on its Transco system, including a benefit from the Gateway and Riverdale South to Market expansions that entered service during the fourth quarter.

Those positives more than offset some weakness in the West segment, where earnings slipped about 6%. Asset sales and lower revenue on systems in the Barnett Shale and Mid-Continent region more than offset positives across several of its other businesses in this region.

A twist of pipelines with a bright sun shining through.

Image source: Getty Images.

Williams Companies' outlook

Despite continued volatility in the oil and gas market, Williams Companies reaffirmed its 2020 guidance. That forecast puts adjusted EBITDA in the range of $4.95 billion and $5.25 billion, up about 2% from 2019's level at the midpoint. DCF, meanwhile, should be in the range of $3.05 billion to $3.45 billion, down about 1% at the midpoint, due in part to its high-end showing last year. That's still enough cash to cover Williams' high-yielding dividend -- which it has already increased by 5.3% for 2020 -- by a comfortable 1.7 times.

Williams also reaffirmed its capital expenditure guidance of $1.1 billion to $1.3 billion, which is significantly below the $2 billion it invested this year. Because of that spending decline, Williams anticipates that it can fully finance capex with its retained cash after paying the dividend and still have some room to spare. It expects to maintain a solid balance sheet, backed by a leverage ratio of around 4.4 times debt to EBITDA, which is right around last year's level and lower than the year-ago level of 4.8 times. Though the company continues to evaluate the potential for additional asset sales, which could enable it to achieve its long-term leverage target of 4.2 times debt to EBITDA more quickly.

The company's ability to fully fund its dividend as well as capital spending within cash flow puts its high-yielding payout on rock-solid ground, especially when factoring in its improving balance sheet.

An increasingly sustainable income stream

Williams Companies delivered record performance last year. Add that to the strategic moves it made, and Williams firmed up the foundation around its high-yielding payout. In light of that and its outlook for an even more sustainable payout this year, it's an excellent stock for investors looking for an attractive income stream.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Williams Companies, Inc. Stock Quote
The Williams Companies, Inc.
WMB
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