Targa Resources (TRGP 0.76%) tends to get easily overlooked. Pipeline behemoths Energy Transfer and Enterprise Products Partners overshadow it in the midstream industry. Because of that, many investors have likely missed that its stock has crushed the S&P 500 (^GSPC 1.33%) this year. The midstream company has soared over 30% this year, roughly three times the gain of that broader market index.
Targa could be just getting started. The company expects to generate significantly more free cash flow in 2025, fueled by upcoming expansion project completions. Because of that, the pipeline stock could have the fuel to continue rallying.
NYSE: TRGP
Key Data Points
Preparing for a re-acceleration
Targa Resources is coming off a record 2023. The midstream company grew its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 22% to a record of over $3.5 billion. It delivered record full-year Permian, natural gas liquids (NGL) transportation, fractionation, and liquefied petroleum gas (LPG) export volumes in 2023. The company benefited from higher NGL supplies from its gathering and processing systems and those supplied by third parties. It also got a boost from the recent expansion of its LPG system and improved market conditions.
The midstream company expects to continue growing this year. It sees adjusted EBITDA rising by around 8% to between $3.7 billion and $3.9 billion. It should continue benefiting from strong market conditions and recently completed expansion projects. Targa recently completed its new Wildcat II processing plant in the Permian Basin and is starting up another new fractionator.
The company plans to invest $2.3 billion to $2.5 billion on expansion projects this year. Those projects will enter service in the coming quarters. That drives its belief that its capital spending will decline by about $1 billion next year. That decreased capital spending and rising earnings from recently completed projects should fuel a meaningful increase in its free cash flow in 2025.
Ramping up cash returns
Targa Resources already produces a lot of free cash flow after funding expansion projects. That's giving it the money to return to shareholders through dividends and share repurchases. The company spent a record $373.7 million on share repurchases last year. It has continued gobbling up its stock this year, buying back another $124 million in the first quarter.
The company also announced a massive 50% increase in its dividend this year. Targa is boosting its annualized rate to $3.00 per share, giving it a 2.6% forward dividend yield at the recent share price. That's double the S&P 500's 1.3% dividend yield.
Targa's dividend could continue growing briskly in the coming years. Its free cash flow will see a meaningful boost in 2025 as several expansion projects currently under construction come online and capital spending declines. However, while it expects investment spending to decline next year, it still has lots of growth ahead. Due to strong customer demand, Targa recently approved the construction of a new natural gas processing plant in the Permian Basin that should come online in the fourth quarter of next year. It also approved building a new NGL fractionator that it expects to complete in the third quarter of 2026. These projects will supply it with incremental cash flow when they come online, potentially providing more fuel for future dividend increases.
Lots of fuel to continue growing its dividend
Targa Resources has quietly delivered market-crushing returns this year. It's benefiting from strong market conditions and expansion projects, which are fueling record volumes and earnings. With more projects in the pipeline, Targa's cash flow should continue rising. That could give it the fuel to continue pumping up its dividend and buying back its stock. Those catalysts could provide Targa with the power to continue producing market-crushing total returns. Because of that, investors might want to take a closer look at Targa.
