Editor’s Note: Today’s Safety Net is penned by Financial Research Associate Kyle Amato. Below, Kyle lifts the hood on a 7.07%-yielding oil and gas transporter.
– Mable Buchanan, Managing Editor
Today, we revisit a popular master limited partnership (MLP) with a booming yield! Chief Income Strategist Marc Lichtenfeld last reviewed this stock back in May 2020, at which time it earned a “C” rating from SafetyNet Pro. But a lot has changed since…
Based in Philadelphia, Pennsylvania, Energy Transfer (NYSE: ET) manages the transportation of natural gas, refined products and crude oil through its large network of pipelines.
Energy Transfer’s oil segment and investment in Sunoco (NYSE: SUN) make up most of its revenue, each accounting for 30% of total sales.
Energy Transfer sports an enticing 7.07% yield – but can the company maintain such a high distribution?
Let’s take a look at its cash-generating power…
Energy Transfer’s cash available for distribution (CAD), a measure of cash flow for MLPs, declined 7.6% from 2019 to 2020. This year, CAD is expected to tick higher; however, it is still projected to be lower than it was two years ago.
Declining cash flow is never a good sign for dividend investors. If Energy Transfer’s cash flow continues to decline, its distribution could quickly become unsustainable.
As Marc mentioned last year, the company had a hefty debt load and a debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of 5.94.
This number skyrocketed to 7.74 in 2020. Energy Transfer took on an additional $5 billion of debt in its acquisition of pipeline company SemGroup. A debt level this high will be difficult to maintain as high-interest payments dry up cash.
On the bright side, despite high debt levels, the company’s payout ratio is expected to be just 22% this year. Marc is comfortable with an MLP paying out as much as 100%. Energy Transfer’s 22% payout ratio provides a strong cushion to support the distribution if cash gets tight.
Until recently, Energy Transfer had a strong history of distribution growth. It raised its distribution every year between 2007 and 2018. However, the company cut its distribution in 2020 to $0.92 a share in an effort to use its excess cash to decrease its debt load.
The company’s main concerns continue to be its stagnant cash flow and high debt level.
Fortunately, Energy Transfer’s payout ratio remains low, providing some level of safety. However, if cash flow declines further and the company is unable to service its debt, another cut could be on the horizon.