Energy Transfer (ET +1.96%), one of the leading midstream pipeline operators in America, might not seem like an exciting stock. But over the past five years, it has rallied 165% and delivered a total return of 291% after including its reinvested distributions. The S&P 500 only advanced 89% and generated a total return of 104% during the same period.
Some investors might be wary of investing in Energy Transfer after those market-beating gains. But I believe it's still a great long-term buy for four simple reasons.
Image source: Getty Images.
1. A resilient and growing business
Energy Transfer provides pipeline, storage, and terminal services for natural gas, natural gas liquids, crude oil, and refined products. It operates over 135,000 miles of pipeline across 44 states, and it expanded aggressively over the past five years by acquiring Enable Midstream Partners, Lotus Midstream, Crestwood Energy Partners, and WTG Midstream. It generates most of its revenue by charging upstream extraction companies and downstream refining companies "tolls" to use its infrastructure.
Energy Transfer's business model is resistant to volatile gas and oil prices, since it will generate revenue as long as those natural resources are flowing through its pipelines. That makes it a good choice for investors who want some exposure to the energy sector without its cyclical volatility.
NYSE: ET
Key Data Points
Over the next few years, it plans to expand its pipeline operations in the Permian Basin, integrate its recent acquisitions, and grow its smaller business of liquefied natural gas exports. That expansion should fuel its long-term earnings and cash-flow growth.
2. Its high yield is a good hedge against lower rates
The Federal Reserve cut its benchmark rates three times in 2024, and it's expected to execute at least one or two more rate cuts this year. Those rate cuts will make CDs and T-bills, which soared in popularity as interest rates rose, less appealing than high-yield stocks. Energy Transfer's forward yield of 7.4% is already much higher than the 10-Year Treasury's 4.3% yield, so it should attract more income investors as interest rates decline.
Lower rates can also weaken the U.S. dollar and make it cheaper to buy oil and gas (which are priced in dollars). That cyclical trend could boost the market's demand for those commodities, drive up their market prices, and generate tailwinds for its upstream and downstream customers.
3. Its cash flow easily covers its distributions
As a master limited partnership (MLP), Energy Transfer pays distributions that include a return of capital (a portion of investors' invested cash) instead of regular dividends, which don't include a return of capital. Its distributions are supported by its distributable cash flow (DCF).
In 2020, Energy Transfer's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and DCF declined as the pandemic forced many of its customers to suspend their operations. But both metrics rose again over the following years as the pandemic passed. Its DCF also consistently covers its annual distributions.
|
Metric |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
|---|---|---|---|---|---|---|
|
Adjusted EBITDA |
$11.21B |
$10.53B |
$13.05B |
$13.09B |
$13.70B |
$15.48B |
|
Annualized DCF* |
$6.25B |
$5.74B |
$8.22B |
$7.45B |
$7.58B |
$8.36B |
|
Total distributions |
$3.23B |
$2.47B |
$1.78B |
$3.09B |
$3.99B |
$4.39B |
Data source: Energy Transfer. *Adjusted basis.
4. It looks cheap relative to its growth potential
From 2024 to 2027, analysts expect Energy Transfer's adjusted EBITDA to grow at a steady CAGR of 5%. With an enterprise value of $121.8 billion, it still looks like a bargain at less than 8 times this year's adjusted EBITDA. That might be why its insiders bought more than six times as many shares as they sold over the past 12 months.
Energy Transfer might not generate much buzz among growth-oriented investors, but it could generate more reliable gains than many other stocks over the next few years. If you're looking for a safe place to park your cash and earn inflation-beating income, Energy Transfer checks all of the right boxes.
