Energy Transfer Dividend Safety: Can This 15.7% Yielder Afford Its Distribution?
Below, Investment U’s Income Expert, Marc Lichtenfeld, takes a look at Energy Transfer’s dividend safety.
Energy Transfer (NYSE: ET) is a favorite of income-seeking investors due to the stock’s strong distribution yield. (Energy Transfer is a master limited partnership, or MLP. MLPs pay distributions, not dividends.)
The company has 90,000 miles of pipelines and boasts that 30% of the United States’ oil and natural gas moves through those pipelines.
Now, thanks to the collapse in anything oil-related, the stock yields a whopping 15.7%. But can investors bank on continuing to receive the distribution?
Energy Transfer’s cash available for distribution (CAD), a measure of cash flow for MLPs, had been steadily rising, but it is expected to take a detour lower this year.
SafetyNet Pro does not like to see cash flow declining. It takes that offense very seriously and will penalize a company’s rating because if the slide continues, the company could see its distribution become unaffordable.
SafetyNet Pro is a groundbreaking tool that predicts dividend cuts with stunning accuracy. With it, you can determine the dividend safety rating of nearly 1,000 stocks. Access to SafetyNet Pro is reserved exclusively for subscribers of Marc’s newsletter, The Oxford Income Letter. To learn more about SafetyNet Pro and The Oxford Income Letter, click here now.
Energy Transfer Dividend Safety Rating
Energy Transfer also has a lot of debt. Its debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio is 5.94. That’s a hefty debt load to support, especially if cash flow is declining.
On the positive side, the company’s payout ratio is low. Last year, it paid out just 39% of CAD in distributions. Due to the lower CAD expected this year, the payout ratio will likely climb to 59%, which is still an acceptable level.
Energy Transfer has a solid distribution-paying history. It has raised the distribution many times since it began paying one in 2006, although it doesn’t do so every year. The last raise was in 2017. It has never cut the distribution in its 15-year history of paying investors.
The two issues affecting Energy Transfer’s dividend safety rating are its declining cash flow and high debt level. The debt probably won’t be resolved anytime soon, but next year, if cash flow rebounds, so should Energy Transfer’s dividend safety rating.
I’m not expecting a cut. However, the company could reduce the distribution by half and it would still have a very attractive yield of nearly 8%. So if Energy Transfer did lower the distribution, it wouldn’t be a total shock.
As you can see, Energy Transfer’s dividend safety is moderate at the moment. Therefore, it’s important to keep a close eye on this company going forward.
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About Marc Lichtenfeld
A master of the steady, reliable science of income investing, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report. He has also appeared on CNBC, Fox Business and Yahoo Finance. His book Get Rich With Dividends: A Proven System for Double-Digit Returns achieved best-seller status shortly after its release in 2012. He captures the hearts and minds of readers approaching their golden years in his daily e-letter, Wealthy Retirement.