Energy Transfer (ET 0.44%) already provides investors with an enormous dividend. The energy-focused master limited partnership (MLP) currently yields over 6.8%. That's significantly above the S&P 500's 1.6% dividend yield.
As attractive as Energy Transfer's cash distribution might be these days, it's still quite far from its ultimate goal. It could therefore provide investors with a much bigger income stream in the future.
A long way to grow
Energy Transfer's current dividend payment is $0.20 per unit each quarter, or $0.80 per unit annualized. That's more than 30% above last year's level following two sizable distribution increases this year. The MLP increased its payment by 15% in January and another 14.3% in April.
However, the current payout level remains well below the MLP's prior peak of paying $0.305 per unit each quarter ($1.22 per unit annually). That's because the company slashed its payment in half in 2020 to shore up its financial profile following the initial shock of the pandemic. It set an ultimate goal to return its payout to that level in the future. That means Energy Transfer would need to increase its payment by another 52.5%. If the company can deliver on that goal, it implies a dividend yield of 10.4% at the current price.
What needs to happen to achieve that goal?
Energy Transfer is already generating enough cash to support that higher payout level. The MLP produced nearly $2.1 billion of distributable cash flow during the first quarter. It paid out $618 million to investors, covering its payment with cash by a comfy 3.36 times. That allowed the MLP to retain about $1.5 billion in cash after paying distributions. That was more than enough money to cover its expansion-related spending of $390 million, giving the company cash to pay off more debt. As a result, the company is getting closer to achieving its leverage target of 4.0 to 4.5 times debt to earnings before interest, taxes, depreciation, and amortization (EBITDA).
Achieving its targeted leverage range is one of the factors holding Energy Transfer back from boosting its payout up to its former level right away. It wants to retain more cash in the near term to continue paying off debt.
The other factor holding back distribution growth is that Energy Transfer wants to have the flexibility to take advantage of emerging growth opportunities. Russia's invasion of Ukraine has caused oil and gas prices to surge, shifting the global energy landscape. Countries are prioritizing energy security by locking up supplies of liquified natural gas (LNG). That could benefit Energy Transfer by finally allowing it to move forward on its Lake Charles LNG project. It could also enable the company to expand some of its other natural gas pipelines. Meanwhile, Energy Transfer is exploring the potential of expanding into the petrochemicals sector and building a project in Panama.
Given the large scope of project opportunities the company is currently exploring, it wants to take a conservative approach to distribution increases to have the financial flexibility to pursue these potential projects. Once it has a firmer grasp on its future capital spending needs, the MLP will know how quickly it can deliver on its distribution goal. Furthermore, these projects will help grow its cash flow, which could give the MLP the fuel to boost its payout well beyond its former peak in the future.
High octane income growth ahead
Energy Transfer already offers investors a big-time dividend yield. That payout appears poised to head even higher, given the MLP's goal to return the payment to its former peak. While a few things are holding it back, Energy Transfer looks like an enticing option for investors looking for an already large income stream that could head much higher in the future.
