Nikolay Amoseev/iStock via Getty Images
Nikolay Amoseev/iStock via Getty Images
Energy Transfer (NYSE: NYSE:ET ), with its $9.5 / share price, and $30 billion market capitalization, recently announced a 15% increase in its dividend to $0.70 / share annualized. That pushes the company's dividend yield to almost 7.4%, and highlights the same financial strength we've discussed before. As we'll see throughout this article, the company's impressive asset portfolio will support even higher shareholder returns, showing the company's asset strength.
Energy Transfer has one of the best asset portfolios in the industry, integral to our modern way of life.
Energy Transfer Overview - Energy Transfer Investor Presentation
Energy Transfer performed well throughout 2021 and we're looking forward in the upcoming weeks to see the company's 2022 guidance and results for the close-out of 2021. The company has had strong operational performance and its new assets which it has spent billions on in recent years are starting to pay out and increase production.
The company is consistently finding additional operational synergies. As we'll discuss later, it has strong insider support. It has a unique and integrable portfolio, which we expect will drive substantial shareholder rewards.
Energy Transfer has some of the strongest insider support among large midstream companies.
Energy Transfer Insider Support - Energy Transfer Investor Presentation
The company has seen consistent insider purchases, and executive Kelcy Warren has a multi-billion dollar stake in the company. That stake and the >12% insider ownership will provide continued investment for the company to increase shareholder returns.
The continued insider support shows how management feels the company is undervalued.
With the impact of the oil collapse, oil companies were forced to start self-funding their own capital expenditures, and Energy Transfer has been forced to manage its debt.
Energy Transfer Capital Investments - Energy Transfer Investor Presentation
Energy Transfer was forced to revamp its approach to growth capital spending as investors frowned upon debt-induced capital growth. We haven't seen significant guidance of the company having truly learned its lesson here versus the market forcing it to learn its lesson, however, the takeaway here is the company has changed its approach to growth.
The company is still investing in growth to the tune of $1.6 billion in 2021 and ~$600 million a year in 2022-2023. The company hasn't provided an update to its guidance here including its Enable Midstream acquisition, however, we expect overall capital spending to remain muted. At current levels, the company is spending 2% of its market cap on growth.
However, it's worth noting that this comfortably affordable capital spending still represents a form of shareholder returns. The company's 2% of market cap spending here can fund numerous bolt-on projects with double-digit shareholder returns. That projects help to highlight how Energy Transfer is a valuable investment.
The consistent hold-up on Energy Transfer's future shareholder returns has been investor concerns over its debt load.
Energy Transfer Long-Term Debt - Macrotrends
Energy Transfer had strong 1Q 2022 financial performance which enabled the company to reduce its debt from more than $50 billion to less than $45 billion. The company's target debt ratio is 4-4.5x EBITDA, which would imply a debt load in the range of $40-45 billion. That's within the company's debt range, but leaves the potential for further decreases.
The takeaway here is that the company is comfortable with its current debt load, implying an interest in utilizing its cash flow for other forms of shareholder rewards.
Energy Transfer has a unique ability to generate substantial shareholder rewards for investors.
The company has roughly $6 billion in annual DCF. Its new dividend takes that down to $3.5 billion. The company's capital spending takes that to the high $2 billion, and the company is already at its debt target. It has yet to guide what it'll do with the remaining of its cash flow, however, regardless of how the company spends that, it can generate double-digit returns.
We would like to see the company implement a substantial buyback authorization, which it has yet to give guidance of doing. That'd enable the company to generate substantial shareholder returns and save on dividend expenses. However, with an almost 7.5% dividend yield, you're simply getting paid to wait.
The company's growth capital continues to grow earnings over the long run, the company has a manageable debt load, and at minimum, it's focused on dividend growth. This makes the company a valuable investment.
Energy Transfer's risk is volumes. The company has an impressive and debt-fueled portfolio of assets that it's built that are essential to the modern standard of living. But in times of uncertain prices, production decreases, and so too does the volumes flowing through midstream assets. Given the company's hefty debt load, a temporary slowdown here could hurt shareholder returns.
Energy Transfer's management has reaffirmed its faith in the company's ability to drive future shareholder rewards and recover from the crude oil collapse. The company recently announced a 15% increase in its dividend, driving the yield to 7.4%. This is a comfortably affordable increase for the company that we expect to be the first of many.
The company had a lucky 1Q 2021, enabling it to significantly reduce its long-term debt. We expect the company to continue opportunistically reducing its debt while investing in shareholder returns and growth capital. That continued policy will lead to double-digit shareholder returns. Putting this together makes Energy Transfer a valuable investment.
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