Energy Transfer (ET +1.02%) is an income powerhouse. The master limited partnership (MLP) offers a yield of over 7%, significantly higher than the S&P 500's 1.2%. The midstream company supports that payout with stable and steadily rising cash flow.
These features make the MLP an appealing option for those who are seeking a growing passive income stream and are comfortable receiving the Schedule K-1 Federal Tax Form it sends investors each year.
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A durable energy company
Energy Transfer operates a diverse portfolio of energy infrastructure assets. The company's pipelines, processing plants, storage terminals, and export facilities primarily generate fee-based cash flow backed by long-term contracts and government-regulated rate structures. It currently gets 90% of its annual earnings before interest, taxes, depreciation, and amortization (EBITDA) from steady fee-based sources.
The MLP's low-risk business model consequently generates a steady stream of cash flow, enabling it to pay lucrative distributions to its investors. During the first quarter, the company produced $2.3 billion of distributable cash flow, easily covering the $1.1 billion it paid to investors. That allowed it to retain substantial excess free cash flow to fund new investments and maintain a strong financial profile.
NYSE: ET
Key Data Points
Energy Transfer currently has a leverage ratio in the lower half of its 4.0-to-4.5 target range, backing its rock-solid investment-grade credit ratings. That puts it in the strongest financial position of its history. It also provides the company with ample balance sheet capacity to continue investing in and expanding its energy midstream platforms.
A steady grower
The midstream giant utilizes its financial flexibility to invest in organic expansion projects and make value-enhancing acquisitions. Those dual drivers have fueled steady growth over the years. Energy Transfer has increased its adjusted EBITDA from $10.5 billion in 2020 to $15.5 billion last year. It expects its earnings to grow by another 5% this year.
The MLP has lots of visible growth coming down the pipeline. It expects to invest about $5 billion into capital projects this year, which should come online through the end of 2026. Its current slate of expansions includes several more gas processing plants, additional export capacity, and a new large-scale natural gas pipeline. These projects should provide it with substantial incremental earnings in the 2026 to 2027 timeframe.
Energy Transfer has many more expansion projects under development. It's close to approving the construction of a major liquified natural gas export terminal. It's also pursuing several projects to supply natural gas to power plants and data centers. The company sees catalysts such as rising Permian Basin production, growing U.S. power demand, and increasing global natural gas liquids exports providing it with numerous growth opportunities in the coming years.
The MLP also routinely makes strategic acquisitions. Last year, it acquired WTG Midstream for approximately $3.3 billion, following a $7.1 billion deal for Crestwood Equity Partners and a $1.5 billion deal for Lotus Midstream in 2023. These deals enhance its operations while growing its cash flow. With Energy Transfer in its best financial position in its history, it has ample financial capacity to continue making acquisitions.
Energy Transfer's growth drivers should support steadily expanding earnings and cash flow. That should enable the MLP to continue increasing its distribution within its 3% to 5% annual target range.
A steady income producer
Energy Transfer offers investors a massive yield backed by stable cash flow and a strong financial profile. It has ample financial flexibility to invest in growing its operations and increasing its high-yielding distribution. These features make the midstream giant an excellent investment option for those seeking a steady income stream.
