A 12% Yield Headed the Wrong Way

Marc Lichtenfeld By Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Safety Net

Last April, I reviewed Energy Transfer Partners (NYSE: ETP). The stock offers a 12% yield but scored a D rating from SafetyNet Pro.

However, I said that if the company is able to execute, then it could be on the verge of an upgrade.

Management had stated that it wanted to get the coverage ratio to 1.05. The coverage ratio is the ratio of cash flow to the distribution. A 1.05 coverage ratio would mean that the company generates $1.05 for every $1 distribution paid to shareholders.

In April, the coverage ratio was 0.99. That means the company was paying shareholders $1 for every $0.99 that it took in. That hurt its rating.

If management got the coverage ratio up to 1.05, as planned, it would have resulted in a dividend safety rating upgrade.

But the coverage ratio did not get up to 1.05. In fact, it got worse.

Much worse.


When the full-year 2016 results are reported in February, Energy Transfer Partners is expected to have generated only $0.61 in cash flow for every $1 it paid out to shareholders last year.

This year, it is projected to pay out $2.3 billion in distributions against $2.3 billion in cash flow. Now, if cash flow covers the distribution, the stock could receive an upgrade. But that’s a big if at this point.

Another concern is the company’s balance sheet.

In my last review, I noted that the natural gas pipeline company had $28.5 billion in debt versus $27 billion in equity. The balance sheet has deteriorated since then. As of the September quarter, Energy Transfer Partners had $29.1 billion in debt and $19.3 billion in equity. Plus, last week, it sold another $1.5 billion in notes, adding to the debt burden.

Energy Transfer Partners has an excellent history of raising the distribution. The company boosted it 33 times since 1999… though it hasn’t raised it in more than a year.

The company does still have that juicy 12% yield. But it appears that might be in jeopardy if Energy Transfer Partners can’t get cash flow above what it pays in distributions.

That figure will be critical to watch in 2017. If it appears that cash flow will not cover the distribution again this year, I’d expect a distribution cut.

Dividend Safety Rating: F

If you have a stock whose dividend safety you’d like me to analyze, leave the ticker symbol in the comments section.

Good investing,

Marc