Power Transfer (NYSE: ET) is a taxpayer, operating one of the largest medium-sized businesses in North America. And it has been very profitable for income investors lately. That comes from both distribution yield, which is 7% higher, and distribution growth. Here’s what you need to know before you buy it.
Distribution of Energy Transfer is increased quarterly through 2025. Every quarter through 2024. Every quarter through 2023. And quarterly in 2022. That’s the kind of honesty a budget lover can happily put on their calendar. To support that growth the business generates enough undistributed income to cover its distribution with a heavy 1.8x.
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There is a lot of room for strain before the distribution is at risk of being cut. In fact, the giant has billions of dollars in capital investment plans expected to keep distribution growing. The goal is a moderate increase of about 3% to 5% per year. Add 3% distribution growth to the 7% yield and you get 10%, which is the return investors expect from the stock over time.
If you are a forward-looking investor, Energy Transfer will probably look very attractive based on the information above. If you look back only to 2020, however, you may come back with less certainty. During the power outages associated with the COVID-19 pandemic, Energy Transfer cut its distribution in half.
To be fair, the purpose of the reduction was to free up cash so that management could strengthen the balance sheet. That happened, and as noted, the distribution is back in growth mode. It is again above where it was before the cut. However, there are other mid-sized businesses with attractive yields and better distribution track records, such as Business Product Partners (NYSE: EPD). Enterprise has a 27-year annual distribution increase behind it and a still-high 6% yield.
Trust is a major issue you need to consider when looking at midstream master limited partnership (MLP) Energy Transfer. The timing of the 2020 distribution cutoff during the recession is a potentially dangerous event. The yield is high, but the distribution record is nowhere near as compelling as a mid-range peer like the Enterprise. More conservative types may decide that the extra yield isn’t worth the extra uncertainty.
