I like to invest in dividend-paying stocks. I especially like it when they trade at dirt cheap valuations, because that usually means they have a higher dividend yield.
Energy Transfer (ET +2.54%) currently stands out for its combination of yield and value. Here's why it's my top deep value dividend stock pick this month.
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A bottom-of-the-barrel valuation
Energy Transfer trades at about nine times its enterprise value (EV) to EBTIDA (earnings before interest, taxes, depreciation, and amortization). That's the second-lowest valuation in the energy midstream sector, where the average is about 12 times EV/EBITDA. That deep value price is why the master limited partnership (MLP) currently offers a 7.9% yield.
There's no reason for Energy Transfer to trade at such a deeply discounted valuation. It's in its best financial shape in its history. The company generates enough cash to cover its high-yielding payout by about 1.9 times, and its leverage ratio is in the lower half of its 4.0-4.5 times target range.
NYSE: ET
Key Data Points
Meanwhile, the MLP has plenty of growth coming down the pipeline. It's investing $5 billion into growth capital projects this year, which should deliver meaningful incremental cash flow as these assets enter service through the end of next year. It recently approved several more growth capital projects, extending its growth visibility through the end of the decade. Additionally, Energy Transfer has many more expansions in development to support growing gas demand from AI data centers, power plants, and global export markets.
Those expansion projects should give the MLP the fuel to continue increasing its payout. It recently provided investors with another raise, aligning with its plans of growing the payout by 3% to 5% per year.
Energy Transfer stands out for investors seeking a high yield and long-term upside potential -- provided they're comfortable with the Schedule K-1 tax form the MLP sends each year. With robust current income and the possibility for meaningful upside as its valuation improves, Energy Transfer could deliver strong total returns over time.
