Energy Transfer Has Just Raised the Guidelines. Is it Time to Invest in This 8% Yielding Stock? - Latest Global News

Energy Transfer Has Just Raised the Guidelines. Is it Time to Invest in This 8% Yielding Stock?

Energy transfer (NYSE:ET) last week, the company raised its full-year guidance when it reported its first-quarter results, continuing the company’s recent strong operating performance. The stock returned nearly 40% last year including distributions.

The Master Limited Partnership (MLP) quickly halved its distribution in autumn 2020 in order to better do justice to its debt load and the situation on the energy market. Since then, however, the company has turned a corner and just delivered another solid quarterly report that included an increase in its payout. The payout is now well above the level before the company cut, which is a testament to how quickly the company was able to turn things around.

A great start to the year

As a pipeline company, the volumes for energy transfer and its results are of great importance. In this regard, the company recorded volume growth across all segments, led by a 44% increase in crude oil transportation volume. Crude oil terminal and NGL fractionation volumes also increased by double digits, up 11% and 10%, respectively.

This resulted in adjusted EBITDA increasing nearly 13% to $3.9 billion in the quarter. Distributable cash flow (DCF) to partners, which is the amount the company generates before investing in growth projects (capex), was $2.4 billion, up 17% year over year. The company increased its payout per share by 3.3% year over year to $0.3175.

The company paid out $1.13 billion in distributions to shareholders during the quarter, a payout ratio of nearly 2.1x. After paying distributions, Energy Transfer had excess cash flow of $1.3 billion and spent $461 million in growth capital expenditures during the quarter. This suggests that the distribution is currently very well covered.

Looking ahead, Energy Transfer raised its full-year EBITDA guidance to a range of $15.0 billion to $15.3 billion from $14.5 billion to $14.8 billion. The new forecast reflects Sunoco LPs Acquisition of NuStar Energy. Energy Transfer owns the general partner interest, incentive distribution rights and 28.5 million common units of Sunoco. Sunoco’s results are included in Energy Transfer’s results, so the latest acquisition will help boost results.

Energy Transfer also now expects to spend between $2.8 billion and $3.0 billion on growth capital projects this year. About half will go to natural gas liquids and refined products projects.

Even with the increased growth investments for the year, Energy Transfer will continue to have a high level of sales certainty and scope for increases throughout the year and beyond. Its updated adjusted EBITDA guidance assumes full-year DCF of at least $9 billion, while the company will spend nearly $3 billion in growth capital expenditures. Even if the payout is slowly increased to $0.325 per share per quarter through the end of the year, around $4.5 billion in distributions will be paid out. That should leave about $1.5 billion in excess cash to continue paying down debt.

a natural gas pipeline through the forest.

Image source: Getty Images.

A cheap stock

With approximately 90% of Adjusted EBITDA coming from fee-based activities, Energy Transfer has a relatively stable and predictable business model. Through growth projects and M&A, the company is targeting solid adjusted EBITDA growth of 11% this year. Sales are now well covered and offer room for further growth.

Nevertheless, Energy Transfer trades with an attractive enterprise value to EBITDA ratio of just 7.4. That’s a much lower valuation than the company had before the pandemic and before the payout cut.

ET EV to EBITDA (Forward) chart.ET EV to EBITDA (Forward) chart.

ET EV to EBITDA (Forward) chart.

Given that Energy Transfer not only restored its payout, but increased it above preliminary levels, the stock should have solid upside potential as investors regain confidence in the company. The yield is 8% and the distribution is well covered. The company’s balance sheet is now in strong shape and the company’s senior unsecured debt rating was upgraded by ratings agency Fitch earlier this year.

With this in mind, Energy Transfer appears to be an attractive stock for income-oriented investors to invest in for the long term.

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Geoffrey Seiler holds positions at Energy Transfer and Sunoco. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Energy transfer has just raised the guidelines. Is it time to invest in this 8% yielding stock? was originally published by The Motley Fool

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