Williams Companies (WMB 3.90%) is a leader in natural gas infrastructure. This business generates lots of recurring cash flow. That gives Williams the funds to pay an attractive dividend that currently yields 5.7% and invest in expanding its operations. The company sees lots of growth still ahead, given the vital role natural gas will play in the energy transition to lower-carbon fuel sources.
Williams recently provided a glimpse at what it sees ahead when it reported its third-quarter results. Here's a look at what should fuel the company's growth in the coming years.
A record quarter
While the future role of fossil fuels remains up for debate, they're vital to fueling the economy these days. That was evident in Williams' third-quarter report. The natural gas infrastructure company gathered and transported record volumes during the period. That helped fuel record earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1.42 billion, which was up 12% year over year.
Those record earnings enabled Williams to generate enough cash to cover its dividend by a comfortable 2.17 times in the quarter. For the full year, it should produce enough cash to cover the payout by 2.03 times even after accounting for a 2.5% increase. That's higher than its initial 1.85 times target. As a result, Williams is generating plenty of excess cash to invest in expansion projects and strengthen its balance sheet. Williams noted that its better-than-expected earnings have it on track to end the year with a leverage ratio of 4.0 times debt-to-EBITDA, an improvement from its 4.25 times guidance. Those factors suggest that the high-yield dividend is on solid ground.
The fuel to keep growing
Williams also made excellent progress on its strategic growth plan in the quarter. The company finished its Leidy South Expansion ahead of schedule. In addition, it continued work on adding another 1.5 billion cubic feet per day (Bcf/d) of high-return expansions across its interstate natural gas pipelines. Overall, the company is investing $1.6 billion across these projects that should enter service over the next several years, helping support growing demand for natural gas from residential, commercial, and power customers. The company is also working on projects to enhance its midstream infrastructure to increase natural gas supplies in key production basins, including the Gulf of Mexico, Haynesville Shale, and Wyoming. These gas infrastructure projects should provide Williams with the capacity to handle more volumes, enabling it to continue growing its earnings and cash flow.
Meanwhile, Williams is starting to invest in other clean energy opportunities beyond natural gas. It's currently advancing 12 solar energy projects. In addition to that, it recently joined forces with leading renewable energy company Orsted to explore clean energy opportunities in the U.S. They are looking for ways to leverage Orsted's renewable energy and hydrogen expertise with Williams' natural gas infrastructure and processing experience. They're considering co-developing hydrogen or synthetic natural gas facilities powered by renewable energy. In particular, they're looking at a large-scale wind-powered co-development in Wyoming, where Williams owns lots of land and natural gas infrastructure. Williams is also studying the possibility of building a green hydrogen hub in the state and the potential of blending that fuel on its existing natural gas infrastructure. These opportunities could enable Williams to leverage and expand its existing infrastructure to support the growth of cleaner alternative fuels.
Lots of fuel sources to keep growing
Williams Companies' natural gas infrastructure business continues to produce gobs of cash. That's giving it the funds to cover its dividend, finance expansion projects, and strengthen its balance sheet. Meanwhile, it has already started transitioning its business to even cleaner fuel sources, which should give it the power to continue growing in the future. That suggests its dividend should keep growing, making it a solid choice for income-focused investors.