Dividend stocks have been out of favor with markets for quite some time now, as multi-year high yields on debt instruments lowered their appeal for investors. But now, with Fed Chair Jerome Powell signaling a rate cut in the most unambiguous words, dividend stocks could start to see some traction.
Midstream energy companies are known to pay fat dividends. I find Energy Transfer (ET) to be a worthy bet in that space. The stock’s dividend yield is nearly 8%, and it has delivered double-digit returns in terms of capital appreciation so far in 2024. Wall Street analysts are also quite bullish on the stock, and have given it a consensus rating of “Strong Buy.”
Energy Transfer Brings a Combination of Growth and Dividends to the Table
Usually, high dividend payers – especially those yielding above 5% - don’t bring much to the table in the form of capital appreciation. Also, more often than not, a high dividend yield is caused by a fall in stock price, as opposed to unusually generous dividend payouts. However, Energy Transfer also brings the prospect of decent capital appreciation to the table.
Midstream energy companies usually rake in loads of free cash flow every year, which they use either for strategic acquisitions, dividends, or share repurchases. Energy Transfer has struck a good balance between growth and dividend payouts. During Q2, the company generated distributable cash flows (DCF) of $2.04 billion, which was up 32% YoY. ET spent $549 million on growth capex and $223 million on maintenance capex, while paying a quarterly dividend of $0.32 per share.
In 2024, the company intends to spend between $3 billion-$3.2 billion towards growth capex, of which nearly 45% is earmarked for natural gas liquids (NGLs) and refined products. Midstream comes second, with a 30% share, while crude and “others” will account for 13% and 12% of its 2024 capex respectively.
Energy Transfer’s Earnings Growth
This growth capex is expected to propel the company’s earnings growth. ET raised its 2024 earnings before interest, tax, depreciation, and amortization (EBITDA) guidance to $15.3 billion-$15.5 billion. Even at the midpoint of that guidance, the company’s EBITDA would have grown by 17.5% since 2022.
Analysts expect its adjusted EBITDA to rise by 4.6% in 2025, as well. Focus on growth projects should help buoy Energy Transfer’s earnings in the coming years. Furthermore, natural gas is expected to play an important role as electricity demand rises due to the artificial intelligence (AI) pivot. Along with the domestic market, ET also stands to benefit from rising exports.
ET's Dividend Plans
Energy Transfer intends to increase its distribution by between 3%-5% annually. Here, it's worth noting that while the company places a great emphasis on its dividends, they are not certain.
In 2020, Energy Transfer was forced to cut its distribution by half. At the time, with the pandemic greatly impacting energy demand, several companies either cut their dividends or suspended them altogether. However, ET has since raised its dividend, and the current payout is higher than what it was before the cut.
Wall Street Analysts Are Bullish on ET Stock
Of the 15 analysts covering ET stock, 13 rate it as a “Strong Buy,” while 1 says it's a “Buy.” One analyst rates the stock as a “Hold,” and the mean target price of $19.15 is 19.5% higher than Tuesday's closing prices. ET stock has a Street-high target price of $24, which is almost 50% higher than current price levels.
Should You Buy Energy Transfer Stock?
ET stock trades at a next 12-month enterprise value (EV)-to-EBITDA multiple of 8.12x, which is slightly higher than its five-year average valuation. However, ET's multiples are lower than other midstream companies, like Enbridge (ENB), Kinder Morgan (KMI), and Enterprise Products Partners (EPD).
To be fair, Energy Transfer shares have historically traded at a discount to these companies. The company has been working on improving its financial position, which helped it earn a credit rating upgrade from Moody’s, Fitch, and S&P. Energy Transfer is looking to lower its leverage ratios even further, which should help support its valuation multiples.
Overall, for a conservative investor looking for a high-dividend yield stock, ET should fit the bill. Investors can also expect modest capital appreciation over the next couple of years, which - coupled with the nearly 8% yield - should lead to decent double-digit returns from this leading midstream energy stock.
On the date of publication, Mohit Oberoi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
