Williams (WMB 0.31%) provides investors with an attractive dividend these days. The natural gas pipeline giant has a 5.7%-yielding payout that Williams has grown at a 6% compound annual rate since 2018. That big-time dividend should continue rising in the future.
Fueling that view is the company's strong financial results and outlook for what's ahead. Here's why Williams looks like an outstanding stock to generate passive income these days.
Drilling down into the numbers
Williams recently reported strong financial results. The natural gas infrastructure giant generated $6.4 billion of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2022, a 14% increase from 2021. Meanwhile, it produced $4.9 billion of adjusted funds from operations (FFO) last year. That was up an impressive 21% from 2021's level.
It provided the pipeline company with enough money to cover its high-yielding dividend by a comfy 2.37 times. That allowed Williams to retain cash to fund its expansion while maintaining a strong balance sheet. It ended the year with a 3.55 times debt-to-adjusted EBITDA ratio, down from 3.9 times at the end of 2021 and 26% below its 2018 level.
The pipeline company delivered strong results across the board:
Data source: Williams. Chart by author.
Several catalysts' fueled Williams' growth last year. In the transmission and Gulf of Mexico segment, the company benefited from the acquisition of NorTex and the completion of Transco's Leidy South project. The Northeast gathering and processing (G&P) business got a boost from higher gathering rates. The company's west segment benefited from higher gathering volumes in the Haynesville region and the acquisition of Trace Midstream's assets. Finally, higher commodity prices bolstered the results from gas and natural gas liquids (NGL) marketing services and its other assets.
In addition to producing strong financial results last year, Williams made excellent progress in advancing its strategic plan. It received the necessary approvals to move forward with its Regional Energy Access (REA) expansion project and secured commitments to start its Louisiana Energy Gateway (LEG) project. Williams also completed three strategic acquisitions, buying NorTex Midstream, MountainWest, and Trace Midstream's Haynesville assets.
A look at what's ahead for Williams
The natural gas pipeline giant expects to continue growing in 2023, albeit at a slower pace than last year. The pipeline company sees its adjusted EBITDA rising to a range of $6.4 billion to $6.8 billion. That would put it up by about 3% at the midpoint from last year.
Meanwhile, the company sees its adjusted FFO coming in between $4.7 billion and $5.1 billion, roughly flat at the midpoint from last year. While the pipeline company expects to benefit from acquisitions, expansion projects, and volume growth, lower commodity prices will be a headwind this year.
Despite its sluggish growth this year, Williams has ample financial flexibility to continue growing its dividend. The company expects to increase its payout by 5.3% in 2023, an acceleration from the 3.7% raise it gave investors in 2022. Even at that higher rate, Williams will cover its dividend with cash flow by a healthy 2.25 times. That will enable the company to retain cash to fund expansion projects while maintaining a strong financial profile.
Williams plans to invest $1.4 billion to $1.7 billion on expansion projects this year, slightly higher than the nearly $1.5 billion it spent last year. Most of that spending will be on natural gas infrastructure projects like LEG and REA. However, the company also expects to invest $100 million into new energy venture projects, including solar energy self-powering projects and a carbon capture project in the Haynesville region.
Longer term, the company has a lot of growth coming down the pipeline. Williams' growth prospects recently got a boost from Chevron (CVX 0.57%). Williams will build a new gathering system for Chevron in the Haynesville region to support the energy giant's development plans. In addition, Chevron signed on to ship gas on LEG and agreed to tie its Ballymore project in the Gulf of Mexico to Williams' existing infrastructure.
Those are just some of the growing number of projects Williams has underway that set the stage for another breakout year in 2025 as all its projects come online and generate cash flow. Overall, the company is on pace to grow its adjusted EBITDA at a 5% to 7% annual rate in the coming years, giving it plenty of fuel to continue growing its dividend.
A strong foundation
Williams offers investors an extremely secure dividend. The company's natural gas infrastructure assets generate lots of cash flow, giving it the money to cover the payout and expand its business while maintaining a strong balance sheet. With more growth coming down the pipeline, Williams is an excellent stock for those seeking an attractive, growing passive income stream.
