When screening high dividend paying stocks, energy transfer (ET 1.24%) Comes. After all, the shares yield 6.7%, which puts it at the top of most lists.
This is a particularly attractive return compared to the overall stock market. it is 6 times S&P 500 Index‘S 1.1% yield.
But investing in dividend stocks Of course, it’s not that simple. If that were the case, you could buy the stocks paying the highest dividends.
It takes more work to better understand the company, including examining its fundamentals to determine whether it can afford its current dividend.
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history lesson
Before looking ahead to future payments, it would be wise to take a step back. Energy Transfer has had a bit of a checkered history when it comes to dividends. It cut its quarterly payout by half in 2020 to $0.1525 per share. Energy Transfer cited the need to conserve cash, especially in light of the recession and high debt burden due to COVID-19.
However, starting in 2021, the board of directors regularly increased the dividend. In fact, Energy Transfer has increased payouts quarterly, including an April announcement that it would raise the dividend from $0.335 to $0.3375.
The company currently pays $1.35 per year, and investors have become accustomed to regular increases over the past few years. It’s time to see if Energy Transfer can continue to increase payouts.
Can it afford to raise its dividend?
Energy Transfer’s current results have been very good considering the market conditions caused by the Iran war. This caused disruption in crude oil prices, forcing American energy companies to increase exports. this helps results of energy transfer As it transports and stores energy such as oil, natural gas and natural gas liquids (NGLs).
It set various company volume records in its recently reported first quarter. For example, crude oil transportation volume increased 8% year on year.
This has translated into healthy cash flow. Adjusted distributable cash flow increased to $2.7 billion in Q1, an increase of 16.9% year-over-year. Distributable cash flow provides a useful metric about whether Energy Transfer can afford the dividend because it is net income adjusted for certain non-cash items (for example, depreciation, depletion and amortization), minus distributions to preferred stockholders and maintenance capital expenditures.
today’s change
(-1.24%) $-0.24
current price
$19.34
key data points
market cap
$67B
day limit
$19.30 -$19.75
52wk range
$16.18 -$20.66
volume
11m
average volume
17m
gross margin
11.57%
dividend yield
8.60%
Fortunately, distributable cash flow of $2.7 billion provides more than enough to cover the $1.2 billion dividend. What does the company plan to do with this extra cash flow? Invest in pipeline projects to boost growth. It is positive that the company has enough money to pay dividends and invest in the future.
future dividends
Given the favorable environment and cash flow, it seems a good bet that Energy Transfer will continue to grow the dividend, at least in the near term. Still, it would be nice if the company had a long record of increasing payouts, or even keeping them steady, during tough times.
What is encouraging is that management has improved the balance sheet over the last few years. As of March 31, it had long-term debt of $69.3 billion, or a total capital ratio of 67%. At the end of 2020, Energy Transfer’s long-term debt totaled $51.4 billion, equivalent to a 74% debt-to-total capital ratio.
This should provide some relief to investors as high debt burden was one of the reasons for the dividend cut by the management and the board of directors.
Still, while the short-term outlook looks promising, investors should note that results could be volatile. However, given its focus on fee-based revenues, it is much less dependent on oil and gas prices than energy production (i.e., upstream) companies. Therefore, it generates steady cash flow to support distributions.
For those interested in regular dividend growth and high dividend yields, Energy Transfer fits the bill. However, given its dividend history, I would monitor the situation closely to see if the circumstances persist.