Please ensure Javascript is enabled for purposes of website accessibility

A Reduced Payout Could Be in the Cards for These High-Yield Dividend Stocks

By Matthew DiLallo – Mar 26, 2016 at 9:05AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

More often than not a high-yield is a warning sign. That appears to be the case at Energy Transfer Equity, Energy Transfer Partners, Williams Companies, and Williams Partners.

Over the past year high-yield stocks in the energy sector have been crushed by crashing commodity prices and credit concerns. Unfortunately, the carnage might not be over with a number of high-yielders still holding the line on overly generous payouts. They may be able to hold on in the near term, but should energy prices remain in the doldrums they won't be able to hold on forever. Prime candidates for such a scenario are Energy Transfer Equity (NYSE: ETE), Energy Transfer Partners (NYSE: ETP), Williams Companies (NYSE: WMB), and Williams Partners (NYSE: WPZ). While cuts aren't imminent, it's clear that there are risks by simply looking at their current yields:

WPZ Dividend Yield (TTM) Chart

WPZ Dividend Yield (TTM) data by YCharts

Energy Transfer's numbers don't back up its rhetoric
According to CEO Kelcy Warren, neither Energy Transfer Equity nor its namesake MLP Energy Transfer Partners, are even considering a distribution cut at the moment. In fact, Warren emphatically stated on the company's most recent quarterly conference call that,

There's no contemplated distribution cuts at ETP, whatsoever. We've not looked at any scenario where that would be appropriate or necessary. It's just not – we just don't see that...Our distribution cuts are not required at ETE. And we take our obligation to our unitholders very, very seriously. We have a duty to maintain our distributions. But everybody knows, obviously, that's an option to the extent of that we need access to distributions to maintain our financial health at ETE; would we reach in to that bucket, it would be the last one we'd reach to, but it's certainly possible.

Despite all the rhetoric, the underlying numbers suggest that the distribution isn't exactly on solid ground right now. For 2015 Energy Transfer Partners reported a distribution coverage ratio of 0.99 times, meaning it paid out all it earned, and then some. Further, last quarter that coverage ratio was the beneficiary of some tax benefits, which pushed it up to a seemingly more comfortable 1.07 times despite the fact that the company's underlying earnings as measured by adjusted EBITDA fell from $1.53 billion in the fourth-quarter of 2014 to $1.36 billion last quarter due in part to weakness in the company's midstream segment.

All that to say, the distribution coverage is razor thin right now at Energy Transfer Partners. If the company does reduce the payout, which is something a number of analysts as well as the market expect, it would likely take the distribution of parent company Energy Transfer Equity down with it because the bulk of its income comes from incentive distribution rights from its namesake MLP, which would drop alongside the distribution.

Merger mayhem
If that wasn't enough drama, Energy Transfer Equity is in the process of merging with Williams Companies, which has opened up a whole new set of problems. Last quarter Williams Companies' dividend coverage ratio was a mere 0.91 times while the distribution coverage ratio at Williams Partners would have only been 0.99 times if it wasn't for the fact that Williams Companies waived some of its incentive distribution rights after it terminated its merger with Williams Partners to instead join forces with Energy Transfer Equity. Contributing to Williams Partners' weakness was exposure to commodity prices in its Northwest G&P and West business segments. Because of their weak coverage ratios, both companies could be forced to reduce their payouts.

As if that tight coverage ratio wasn't enough, the company's pending merger with Energy Transfer Equity complicates things even further. The whole situation has gotten bizarre in recent weeks with Energy Transfer Equity letting its CFO go for reportedly trying to scuttle the deal by calling Williams Companies' investors and asking them to vote against the merger. At issue is the $6 billion cash payment that Williams Companies' investors will receive when the deal closes, which Energy Transfer Equity will be funding with an equal amount of new debt. That debt would result in the "mutually assured destruction" of the combined company according to reported comments made by Energy Transfer Equity's now former CFO to Williams' shareholders. If that is the case, the deal going through under its current terms could result in the payouts of all companies involved being cut in order to pay down that added debt.

Investor takeaway
While the CEO of Energy Transfer would beg to differ, the payouts of his companies and those he's seeking to acquire look to be on very shaky ground right now. As things stand, all four companies need to see a lot of things go right, and quickly, including a vast improvement of commodity prices and a thawing out of the capital markets. Otherwise, these companies might not have any choice but to reduce their investor payouts until industry conditions improve.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Williams Companies Stock Quote
Williams Companies
WMB
$33.90 (0.21%) $0.07
Energy Transfer Partners, L.P. Stock Quote
Energy Transfer Partners, L.P.
ETP
Energy Transfer LP Stock Quote
Energy Transfer LP
ET
$12.36 (-0.56%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.