Williams (WMB -0.48%) has flown under the radar of many investors. It's not as big as some of its rivals in the energy midstream sector. It also doesn't offer quite as high a dividend yield as some of its more popular peers.
However, Williams' 5.1%-yielding dividend is on a super safe foundation. Further, the company has a lot of fuel to grow its payout in the future. That's why income-focused investors won't want to overlook the pipeline stock.
A financial fortress
Williams produces over $5 billion in cash flow each year. More than 90% of its earnings come from government-regulated rate structures or long-term, fixed-rate contracts. That steady cash flow puts its dividend on a very solid foundation.
The pipeline company produced enough cash to cover its dividend 2.4 times in 2023. That enables the company to retain more than enough money to maintain and expand its natural gas infrastructure operations. It uses the remaining excess free cash to strengthen its balance sheet, giving it the financial flexibility to make acquisitions as opportunities arise.
Williams ended last year with a 3.6 leverage ratio. That was a 1.2 times improvement from its level in 2018. The company's low leverage ratio and stable cash flow support its solid investment-grade credit rating (BBB/Baa2). It primarily has long-term, fixed-rate debt (4.9% weighed average rate with 10.3 years weighed average maturity) with a well-laddered maturity profile.
The company's combination of steady cash flow, high dividend coverage, and low leverage ratio put its dividend on an extremely firm foundation.
The fuel to grow
Williams has a growing list of organic expansion projects under construction that it's funding with retained cash flow. The company has 10 projects to expand its natural gas transmission pipeline system, five high-return infrastructure expansion projects in the Gulf of Mexico, and five gathering expansions across its gathering and processing (G&P) operations. These projects will come online through 2027, giving it lots of visibility into future earnings growth. They help drive the company's view it can grow its adjusted EBITDA by 5% to 7% annually over the long term.
On top of that, the company has more projects under development. It's evaluating 30 additional natural gas transmission development projects and has further expansion potential in the Gulf of Mexico and its G&P operations. In addition, Williams is evolving as the energy sector transitions to lower carbon sources. It's working on solar and battery projects to self-power its operations, developing carbon capture and storage projects, and working on potential hydrogen hubs.
Williams also has the financial flexibility to make acquisitions as opportunities arise. Williams closed its $2 billion acquisition of a major natural gas storage portfolio earlier this year. Meanwhile, Willaims bought MountainWest (a natural gas transmission and storage business) for $1.5 billion last year. It also closed two strategic transactions in the DJ Basin for $1.3 billion, making it the third-largest gatherer in the region.
These growth drivers should give Williams the rising cash flow to continue increasing its dividend. The company boosted its payout by 5.3% last year and 6.1% in early 2024. It's targeting 5% to 7% dividend growth in 2025, which it can achieve while maintaining strong financial metrics. Given its growth backlog and financial flexibility, Williams should have plenty of fuel to continue increasing its payout well beyond 2025.
A sustainable and steadily rising dividend
Williams offers income investors a very durable dividend. It generates very stable cash flow, has a low dividend payout ratio, and a strong balance sheet. That gives it the financial flexibility to pay its attractive dividend while investing to expand its operations, which should fuel dividend growth in the future. Those features make Williams a very low-risk dividend stock that income-focused investors won't want to miss.
