If you look at Energy Transfer's (ET 1.01%) history, you might have some concerns about trust. Complex machinations around a canceled merger in 2016 and a dividend cut in 2020 would, together, be enough to dissuade many dividend investors from buying the stock. However, for more aggressive dividend investors, the 7.3% yield could be an opportunity, as management looks to prove that it has turned over a new leaf.
What does Energy Transfer do?
Energy Transfer operates in the midstream segment of the broader energy sector. It owns the energy infrastructure that moves oil and natural gas around the world. It largely charges fees for the use of its energy infrastructure assets, like pipelines and storage facilities. The often volatile prices of oil and natural gas are less important than the volume of these fuels moving through Energy Transfer's system. Energy demand tends to be strong even during energy market downturns because of the importance of energy to the modern world.
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The reliable cash flows Energy Transfer generates provide ample support for its lofty yield, with distributable cash flow covering the distribution by a lofty 1.8x through the first nine months of 2025. From this perspective, the distribution seems very safe. The goal is for the master limited partnership (MLP) to grow its distribution at an annual rate of between 3% and 5% a year for the foreseeable future.
In 2026, Energy Transfer plans up to $5.5 billion in capital investments to support its distribution growth. The investment plans are centered around augmenting the natural gas side of the business, since natural gas is increasingly important as a transition fuel in the broader push toward cleaner energy options. There are additional projects in the pipeline that provide a growth path all the way out to 2029.
NYSE: ET
Key Data Points
Looking at Energy Transfer as it stands right now, it appears very attractive. Notably, if you add the 7% yield to the 3% distribution growth rate, you get 10%, which is the return most investors expect from the broader market. That would be the low end of Energy Transfer's expectations if it hits its stated goals.
Looking past previous decisions
The distribution cut in 2020 is troubling, but it was used to reduce leverage and put Energy Transfer in a position to be more consistent. The scuttled merger was the brainchild of a former CEO, and now, new leaders are at the helm. For more aggressive dividend investors willing to overlook past transgressions, Energy Transfer could be entering an exciting new phase in which it becomes just a boring, reliable income stock.
