Williams Companies Inc (NYSE: WMB) and its higher-yielding MLP Williams Partners (NYSE: WPZ) just missed earnings yet again. However, when it comes to successful long-term investing, such things are largely irrelevant.
Instead, I'd advise investors to focus on the big picture, such as three things that should put Williams' on every income investor's radar: its strong payout growth prospects, immense multi-decade growth opportunities, and enormous backlog of fixed-fee, long-term contracted projects.
Dividend growth guidance reiterated
When it comes to investing in pipeline stocks and MLPs, investors most care about the safety and growth prospects of the payout. Despite collapsed energy prices and the fact that Williams Partners failed to cover its distribution this quarter -- it would have, had its recently restarted Geismar plant been running at full capacity -- CEO Alan Armstrong reiterated plans to grow the dividend and distribution by 10%-15% and 7%-11% through 2017, respectively.
When one examines the long-term supply and demand situation for natural gas in America, it's not hard to see why Armstrong is so confident of his company's ability to grow quickly and reward investors with expanding payouts.
Long-term growth opportunities are immense
Both America's supply and demand for natural gas are set to grow enormously over the next 15 years thanks to continued supply growth from the hyper-prolific Marcellus and Utica shales, and several major demand growth catalysts:
- LNG exports expected to grow from 0 to 10.8 billion cubic feet per day by 2025, which represents 10% of America's projected gas production in a decade.
- 92% increase in natural gas exports to Mexico over the next 10 years.
- 33% increase in gas-fired power plant consumption by 2025.
- 20% increase in industrial gas demand over the next decade.
A perfect example of a large domestic market for gas is in the Northeast, where cities like Boston and New York routinely pay 50% to 300% more for gas in the winter than could be obtained from nearby gas boom regions in Pennsylvania and Ohio. Such large and obvious price discrepancies mean strong demand for Williams' pipelines. In fact, the company reported a 43% increase in fee-based revenue from its Northeast gathering and processing segment -- despite an outage on one of its pipelines -- in the past quarter.
Enormous backlog of fixed-fee, long-term contracted projects
Williams' has one of the largest backlogs of growth projects in the industry, with $30 billion in planned investment through 2020, $9.3 billion of which is expected to be completed by the end of 2017. With 99% of that going toward fixed-fee, long-term contracted projects, Williams' future cash flows should not only be highly predictable -- it expects to get 88% of gross margin from fixed-fee contracted operations in 2015, and in the past quarter that figure was 96% -- but also allow it to safely grow its payouts at a quick but sustainable pace that should greatly benefit long-term income investors.
Risks to be aware of
Investors in the higher-yielding Williams Partners should be aware that the MLP has a history of failing to cover its distributions due to weakness in the natural gas liquids market in recent years. While management is confident that the merger with Access Midstream should help it to grow its distribution sustainably going forward, investors need to keep an eye on the MLP's distribution coverage ratio to make sure that management's 7%-11% payout growth guidance isn't a case of promising more than it can realistically and safely deliver.
Bottom line: Earnings misses mean nothing, strong long-term dividend growth prospects mean everything
A bad quarter -- heck, a bad year -- or even the worst oil crash since the financial panic: All are short-medium-term events that should serve as nothing more than potential buying opportunities for long-term income investors.
By focusing on the ways Williams Cos. and its MLP are setting themselves up to take advantage of decade-long major trends in U.S. energy expansion, high-yield investors can maximize their chances of benefiting from both quickly growing payouts, and the likely market-beating total returns that should follow.