Energy Transfer (ET 0.28%) is giving its investors another raise. The master limited partnership (MLP) recently declared its latest distribution, a 15% increase from the prior payment level. With that raise, the energy midstream company has boosted its payout by 75% over the past year.
The new level also pushes the company's yield to an eye-popping 9%. Here's a look at whether income-focused investors should jump at the chance to add this big-time payout to their portfolios.
Back to peak performance
Energy Transfer's new payment level is $0.305 per unit each quarter ($1.22 a year). That brings the distribution back up to its former peak. The MLP last paid distributions at that level in 2020. However, it slashed the payout by 50% toward the end of that year to retain more cash for debt reduction.
That strategy has put the company's balance sheet back on solid ground. Energy Transfer has used its excess cash to reduce debt. As a result, its leverage ratio is now around its targeted level of 4 to 4.5 times debt to EBITDA.
Meanwhile, the company can easily afford its higher distribution. It generated $1.6 billion of distributable cash flow last quarter and produced $760 million in excess cash after covering its distribution.
With capital spending averaging about $500 million a quarter, it should still generate enough money to cover its distribution and growth-related spending with room to spare. That's allowing it to continue paying down debt.
Still an attractive investment
Energy Transfer's steadily improving balance sheet and skyrocketing distribution helped fuel a huge rally in its unit price, which was up 44% last year and more than 10% so far this year.
However, despite that surge, it still trades at a low valuation compared to its peer group:
Image source: Energy Transfer.
A valuation near the bottom of the barrel in its peer group is why the company offers such a high yield these days.
Investors value the company as if it's never going to grow again. But that's far from the case. Earnings and distributable cash flow were up 20% in the third quarter, fueled by acquisitions, expansion projects, and improving market conditions.
There's more growth ahead. The MLP expected to spend between $1.8 billion and $2.1 billion on expansion projects last year, with 90% of that capital going into investments that will generate incremental cash by the end of this year.
Meanwhile, the company has several other expansion opportunities in the pipeline, including a proposed LNG export facility that it finally hopes to approve this year. It's also reviewing opportunities to support the growth of lower-carbon energy, including repurposing existing assets for carbon capture and sequestration, renewable energy generation, and renewable fuel production and storage.
Energy Transfer also has an extensive track record of making value-enhancing acquisitions. It purchased Enable Midstream in a $7 billion deal that closed in late 2021, which helped fuel outsize growth last year. It completed two small bolt-on acquisitions last year, buying Spindletop for $325 million and Woodford Express for $485 million. With its balance sheet back on a much firmer foundation, the company has more financial flexibility to make acquisitions.
These drivers should enable Energy Transfer to continue growing its cash flow. That would give it more money to return to investors, including continuing to increase its big-time distribution.
A compelling value proposition
With its latest raise, Energy Transfer yields more than 9%. That ultra-high-yield is partly due to its very low valuation, even though it still has lots of growth left in the tank. All this makes the MLP an attractive buying opportunity for income-seeking investors.
