There are a lot of things about Energy Transfer (ET +0.43%) stock that an income-focused investor will find attractive. The big one is the roughly 6.8% yield that is backed by a growing distribution. But, as with every dividend stock, there's more to the story than just the dividend yield. A little backstory will help you decide whether or not Energy Transfer is a stock you want to buy now.
What does Energy Transfer do?
Energy Transfer is a little more complex than most midstream companies. Its core is straightforward. It owns energy infrastructure, like pipelines, that helps to move oil and natural gas around the world. This is largely a fee-driven business, so the volume of oil and gas passing through its system is more important than the prices of those commodities.
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That said, the master limited partnership (MLP) also acts as the general partner for other publicly traded MLPs. And it owns positions in those MLPs.
One business it works with is Sunoco LP (SUN +1.00%), which delivers refined products to resellers. That sounds fancy, but the main business is really just delivering gasoline to gas stations. It has, however, been expanding into more pipeline assets for diversification. The second business partner is USA Compression Partners (USAC 1.75%), which owns the equipment that adds pressure to pipelines to increase the flow of the commodities in the pipeline.
In addition to those two public entities, Energy Transfer is also invested in two liquified natural gas operations.
As you can see, there's a lot going on here. For income-focused investors who like to keep things simple, Energy Transfer probably won't be a good fit. A peer like Enterprise Products Partners (EPD +0.08%) has a much more straightforward business model.
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Key Data Points
Energy Transfer has some history to contend with
The real problem with buying Energy Transfer now isn't what its business is today. It's what the business has done in the past. For example, the dividend has been growing since 2021. In fact, it has more than doubled since the start of 2021. That sounds really good until you realize that the dividend was cut in half in 2020.
That was a tough time for the energy sector, given the drop in oil prices during the height of the coronavirus pandemic. The price of West Texas Intermediate Crude, a key U.S. oil benchmark, actually fell below zero at one point during that highly uncertain period. So, in some ways, it makes sense that Energy Transfer cut its distribution in an attempt to ensure it had enough liquidity to muddle through whatever situation came out of the pandemic. However, it's worth noting that Enterprise Products Partners not only increased its distribution in 2020, it has a 26-year-long streak of annual increases under its belt. If you're looking for a reliable dividend stock, Energy Transfer's history suggests that you might be better off elsewhere.
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However, that isn't the end of the history lesson. In 2016, Energy Transfer agreed to buy Williams Companies. It got cold feet, fearing that the transaction would require taking on a huge debt load and, possibly, cutting the dividend. In an effort to scuttle the deal, the company issued convertible securities, with a material portion going to the then-CEO (and current chairman of the board). The convertible would have, effectively, protected the CEO from the effect of a dividend cut, if the deal had gone through.
Energy Transfer was successful in getting out of its agreement to buy Williams, so in some ways, this is a non-issue. But it looks like the CEO took precedence over shareholders, which should probably worry investors. Nothing like this has happened at Enterprise Products Partners.
Energy Transfer requires a high-risk appetite
It isn't that Energy Transfer is un-investable. But you need to go in with your eyes open and have a clear grasp of what you are buying. This is not a simple income investment that has proven reliable and has a long history of placing investor interests front and center. Only more aggressive investors will want to own it. For most, stepping down to Enterprise Products Partners' 6.3% distribution yield will probably be a more prudent decision.
