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Will Williams Companies, Inc. Raise Its Dividend in 2016?

By Matthew DiLallo – Jan 14, 2016 at 8:00AM

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For multiple reasons, all signs point to yes.

Williams Companies (WMB 4.35%) has a long history of growing its dividend, with more than a decade of rather consistent growth:

WMB Dividend Chart

WMB Dividend data by YCharts.

It's a trend that, at least given where things stand right now, appears unlikely to end in 2016, despite the fact that we've seen so many energy-related dividends cut or suspended over the past year. That's largely because Williams Companies has two catalysts on the near horizon that should fuel dividend growth.

Dividend growth catalyst No.1: The merger
Williams Companies is in the process of merging with another general partnership to create a midstream giant. It is a unique deal structure, with Williams Companies becoming a new publicly traded entity to be known as Energy Transfer Corp., which is what current investors will soon own. Among the many benefits of the merger is that investors will receive a higher dividend payment with the pro forma level of dividend for the new company exceeding the 2016 dividend that Williams had forecast it would pay. In other words, just closing the deal results in an immediate dividend increase.

Dividend growth catalyst No. 2: The trickle-up impact of new assets
In addition to that immediate income boost, Williams Companies investors will also benefit from the combined company's stronger growth profile. As the following slide shows, prior to agreeing to the merger, Williams Companies was projected to grow its dividend by a 12% compound annual rate through 2017.

Data source: Energy Transfer Equity investor presentation. 

That's much slower than the 21% compound annual rate that the pro forma company expects to deliver over that same time frame. In other words, by joining forces, Williams will supercharge its dividend growth in 2016 and beyond.

The primary reason why the pro forma company expects to grow its payout so rapidly in 2016 has a lot to do with the fact that its affiliated MLPs have a number of growth projects that should be completed and begin to throw off cash flow. For example, as the following slide shows the crude oil- and liquids-focused MLP Sunoco Logistics Partners (NYSE: SXL) has three projects that just went into service and five more that are expected to enter service in 2016.

Data source: Sunoco Logistics investor presentation. 

As these projects enter service, they will bolster Sunoco Logistics' cash flow, which will enable it to continue to grow its distribution. Given that Williams Companies will soon own a stake in Sunoco Logistics, it will benefit from this growing income stream.

Likewise, Williams Companies will also benefit from growth at Sunoco (SUN 1.50%), which is the retail marketing and fuel distribution arm of its acquirer. Sunoco's growth will be largely fueled by drop-down acquisitions it completed in 2015, with the company closing three notable deals. Those new assets are expected to drive 12% compound annual distribution growth at Sunoco through 2017, with that growth soon to be flowing Williams Companies' way. 

Investor takeaway
Given where things stand right now, Williams Companies' investors should expect to see strong dividend growth in 2016. Having said that, there's always a risk that the merger won't go through as planned or that the continued weakness in oil and gas prices could cause the company to change its plans. So, while it would appear that strong dividend growth is on the horizon, the unpredictability of the energy sector could throw a wrench in these plans. 

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Williams Companies, Inc. Stock Quote
The Williams Companies, Inc.
WMB
$30.71 (4.35%) $1.28
Sunoco LP Stock Quote
Sunoco LP
SUN
$40.00 (1.50%) $0.59

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