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This 9.2%-Yielding Energy Stock Is Finally Getting Its Dividend Back on Solid Ground

By Matthew DiLallo - Feb 22, 2020 at 11:29AM

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Targa Resources' fourth-quarter results and 2020 outlook show that its big-time dividend is a step closer to sustainability.

Targa Resources (TRGP -1.22%) has had to walk a tightrope over the past several years. The midstream company has simultaneously financed a $4 billion expansion program while continuing to pay out a monster dividend to its investors. It has had to be creative, including forming financing partnerships with private equity funds and selling assets, so that it could fund growth and maintain its payout without putting its balance sheet at risk.

All that hard work finally started paying off during the fourth quarter as the largest of Targa's expansion projects entered service. Now its financial metrics are rapidly improving, which is putting its 9.2%-yielding dividend back on a solid footing.

Drilling down into Targa Resources' fourth-quarter results

Metric

Q4 2019

Q4 2018

Change

Adjusted EBITDA

$465.2 million

$332.8 million

39.8%

Distributable cash flow (DCF)

$327.8 million

$214.0 million

53.2%

Dividends paid

$234.9 million

$234.8 million

0%

Dividend payout ratio

72%

110%

N/M

Data source: Targa Resources.

Targa Resources' earnings and cash flow soared during the fourth quarter, fueled by a combination of recently completed expansion projects and favorable market conditions. Leading the way was the company's logistics and transportation segment, where earnings doubled year over year thanks in part to a full quarter of operations from its recently completed Grand Prix natural gas liquids (NGL) pipeline. That segment also benefited from a 12% sequential increase in LPG export volumes due to recently completed enhancements at its Galena Park facility.

Earnings in the energy company's gathering and processing segment, meanwhile, rose 14% year over year. Targa benefited from strong natural gas volume growth in both the Permian Basin and the Badlands region (Bakken Shale).

Those positives more than offset lower NGL and natural gas prices, volumes in the central region, and the impact of $1.7 billion of asset sales.

For the full year, adjusted EBITDA rose 11% to a record of $1.435 billion. DCF, meanwhile, was roughly flat at $947 million.

The year-end surge in Targa Resources' DCF enabled the company to cover its dividend by a much more comfortable 1.4 times during the final quarter. That's quite an improvement for a company that ended up paying out about 100% of its cash flow for the year.

A roll of cash next to a calculator and a sticky note with the word dividends written on it.

Image source: Getty Images.

What's ahead for Targa Resources

Targa expects its earnings and cash flow to keep growing at a fast pace throughout 2020 as it continues benefiting from last year's expansion projects as well as those it expects to bring online this year. In the company's view, it will produce between $1.65 billion and $1.75 billion of adjusted EBITDA this year, which is an 18% increase from 2019's level at the midpoint despite all those asset sales last year.

Targa's surging earnings and cash flow will allow it to generate excess cash after paying its dividend this year. That will enable it to retain some money to help finance its expansion projects so that it doesn't have to be quite so creative this year. Making this task even easier is that Targa expects investment spending to decline about 45% year over year to between $1.2 billion to $1.3 billion.

The company aims to bridge the gap between cash flow and its outlays for the dividend and capital expenses with new debt and noncore asset sales. Targa has already hired an advisor to market its crude oil gathering and storage assets in the Midland side of the Permian Basin.

A high-yield stock to have on your dividend watch list

Targa Resources has worked hard to maintain its high-yielding payout during its recent expansion phase. While the payout isn't on as sound a foundation as others in the energy sector, it's on a much firmer footing this year. That makes it an increasingly intriguing stock for income investors and an ideal one to put on their watch lists.

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

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Targa Resources Corp. Stock Quote
Targa Resources Corp.
TRGP
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