The news over the past year or so has sparked more than its share of discussion about the uncertainties in the economy, especially as it relates to geopolitical tensions across the globe. These tensions and uncertainties have economists worried that inflation will remain elevated. It also has some wondering if the U.S. can navigate a soft landing from the economic fallout caused by the pandemic.
Given this uncertain economic environment, one strong investment option to consider is midstream energy specialist Energy Transfer (ET 0.70%). If you have $1,000 available to invest, now might be a great time to put it toward stock in Energy Transfer. Here's why.
High yield and growing distribution
One of the first things that attracts investors to Energy Transfer is its attractive 8% yield. That yield gives investors $80 in distribution income annually for every $1,000 they invest. As an added bonus, since Energy Transfer is structured as a master limited partnership (MLP) most of that distribution income is tax deferred until the investment is sold. While owning MLPs requires that investors fill out special tax forms called K-1s, they are generally easy to manage if you use a tax preparation program such as Intuit's TurboTax.
Despite its high yield, Energy Transfer's distribution is well covered. For 2023, the company paid out cash distributions of about $4 billion, while its distributable cash flow (DCF) was $7.6 billion. DCF is the company's operating cash flow minus its maintenance capital expenditures (capex). That was good for a robust 1.9x coverage ratio in 2023 and left it with $3.6 billion in excess cash flow after distributions. It spent $1.6 billion in growth capex last year, so it had $2 billion left to pay down debt and buy back shares.
This is important because it helps speak to the safety of the company's distribution as well as its ability to grow the distribution.
The other important aspect to look at concerning distribution safety is leverage. Energy Transfer said it ended 2023 with leverage toward the lower end of its 4x to 4.5x target range when taking into consideration adjustments for acquisitions. A few years ago the company had to cut its distribution in half due to its high leverage, but it has since restored the distribution rate to where it was after getting its leverage to a more sustainable level.
Right now, Energy Transfer's distribution looks to be in good shape and set to grow to new heights. After quickly raising it back to where it was before the cut, Energy Transfer will look to raise its payout by 3% to 5% a year moving forward.
Image source: Getty Images.
Vital to U.S. energy security and an AI beneficiary
Another important aspect of Energy Transfer is that, as one of the largest midstream operators in the country, the company plays a critical role in U.S. energy infrastructure. Its large integrated system touches on nearly every aspect of the midstream value chain, transporting and storing everything from crude oil and natural gas to NGLs (natural gas liquids) and refined products, such as gasoline.
During uncertain times, commodity prices such as oil and natural gas can be quite volatile. However, Energy Transfer has very little direct commodity exposure, instead operating a very fixed-fee business more impacted by commodity volumes, which are also often protected through minimum volume commitments. At the same time, Energy Transfer has the assets to take advantage of commodity price swings and volatility by selling them into different U.S. or international markets, upgrading products, or storing them for later use.
The company has built and acquired an integrated system that cannot be replicated and is vital to U.S. energy security. At the same time, it has solid growth prospects. The company has a robust growth project backlog, and should also benefit from the continued increase in global energy consumption.
With nearly 90,000 miles of natural gas pipelines, Energy Transfer will also be positively impacted by the increased power that is needed to run artificial intelligence (AI)-powered applications. Why? Because artificial intelligence and machine learning models consume huge amounts of power, and that power will largely be supplied by natural gas.
A great time to buy Energy Transfer
Now is a great time to buy Energy Transfer. It has a well-covered, robust distribution yield, and a big potential opportunity in front of it with growing power demand coming from the use of AI. This gives investors a unique combination of safety, yield, and a strong potential growth outlook.
So if you have $1,000 sitting in a savings account, this pipeline stock is a strong option that will give you both additional income as well as solid price appreciation potential.
