Units of Energy Transfer LP (NYSE:ET)

Unfortunately, Energy Transfer had to cut its dividend in the midst of the pandemic due to the unprecedented challenges the sector was experiencing at the time. However, the partnership has since gradually increased its payouts, which now exceed their pre-pandemic levels. Given the exceptional income prospects Energy Transfer units are offering, combined with an improving outlook in the oil and gas midstream space, I am bullish on the stock.

Improving Financials & Outlook

In order to shed light on Energy Transfer’s dividend, it is crucial to delve into the partnership’s financials, which have experienced a positive upswing in line with the overall industry outlook. The company’s first-quarter results showcased significant progress, with an adjusted EBITDA figure of $3.43 billion, representing a noteworthy improvement from the previous year’s first-quarter figure of $3.34 billion.

This remarkable performance can be attributed to record-breaking volumes witnessed across the partnership’s Interstate and Midstream segments and outstanding achievements in NGL pipelines and NGL & Refined Products terminals.

Impressive highlights include Midstream, Interstate, and Nederland Terminal’s outstanding contributions to LPG and ethane exports and the Marcus Hook Terminal setting a new record for ethane exports.

Notably, the optimization efforts at Oasis resulted in an impressive addition of over 60,000 Mcf/d (Mcf/d = a thousand cubic feet per day) of Permian takeaway and fractionation throughput. Furthermore, the average daily throughput at Mont Belvieu surpassed the remarkable milestone of 1 million barrels for the very first time in the partnership’s history.

As a result, the company successfully generated $2.01 billion in distributable cash flows (DCF), as adjusted, for the quarter. Although this metric showed a slight dip compared to the previous year’s $2.08 billion, this was primarily due to marginally higher expenses. Nonetheless, Energy Transfer’s ability to yield a substantial excess cash flow of $1.04 billion after distributions (dividends) is commendable and should bolster investors’ confidence in Energy Transfer’s payouts.

Is Energy Transfer’s 9.6%-Yielding Dividend Attractive?

Energy Transfer’s 9.6% dividend yield presents a highly-attractive opportunity for several compelling reasons. Firstly, Energy Transfer has established itself as an exceptional dividend stock thanks to its robust business model designed to generate resilient and reliable cash flows.

The company primarily operates under a fee-based revenue model, deriving income from the transportation and storage of oil, natural gas, and other energy products through its extensive midstream infrastructure. These revenue streams are supported by long-term contracts with minimum volume commitments, ensuring a predictable and stable source of income. Consequently, Energy Transfer’s cash flows are significantly shielded from short-term fluctuations in commodity prices.

In addition to the inherent stability of Energy Transfer’s cash flows, the company’s dividend remains impressively well-covered, despite its substantial yield. While a high dividend yield may raise concerns about its sustainability, this is not the case with Energy Transfer.

As mentioned earlier, the partnership generated a robust DCF of $2.01 billion and retained $1.04 billion in excess funds. This signifies ample room for the partnership to continue increasing its dividend, as it has consistently done since the dividend cut back in 2020.

Furthermore, during the Q1 post-earnings call, management reaffirmed its commitment to an annual distribution (dividend) growth rate of 3% to 5% while maintaining a leverage ratio of 4x to 4.5x.

These targets, coupled with significant free cash flow allocated for growth initiatives, highlight Energy Transfer’s dedication to sustainable dividend growth. Overall, considering the already substantial dividend yield offered by Energy Transfer and its promising future outlook, income-oriented investors have a compelling case to consider.

Is ET Stock a Buy, According to Analysts?

Turning to Wall Street, Energy Transfer has a Strong Buy consensus rating based on eight unanimous Buys assigned in the past three months. At $17.50, the average Energy Transfer stock price target implies 40% upside potential.

If you’re wondering which analyst you should follow if you want to buy and sell ET stock, the most accurate analyst covering the stock (on a one-year timeframe) is Gabe Moreen from Mizuho Securities, with an average return of 27.93% per rating and a 100% success rate.

The Takeaway

In general, Energy Transfer’s 9.6% dividend yield likely presents a lovely opportunity for income-oriented investors. The partnership’s robust business model, supported by its extensive midstream infrastructure and long-term contracts, should continue to generate resilient and reliable cash flows, shielding it from short-term commodity price fluctuations and supporting its massive dividend.

With strong distributable cash flows producing excess funds after paying dividends and management targeting further dividend hikes moving forward, I hold a bullish view toward the stock.