Have you ever had a romantic partner who went off the rails? Even after they returned to their sweet, normal self, you were always on the lookout for the next blowup…
That’s how income investors should feel about Energy Transfer (NYSE: ET).
It’s a great company with tremendous cash flow and a strong 9.6% yield. But we know that with just one slipup, it all could come crashing down.
Let me explain.
Energy Transfer was formed in 1996. It operates oil and gas pipelines, processing plants, fracking projects, and more.
It generates a ton of cash flow.
Cash available for distribution (CAD) is forecast to be $9.54 billion this year, up from 2022’s $9.25 billion. However, last year’s total was a bit of a red flag, as CAD was $9.63 billion in 2021. We never like to see cash flow decrease.
It’s not a huge problem because Energy Transfer can easily afford the distribution. In 2022, it paid investors $3.93 billion, or just 42% of its CAD.
However, the company went off the rails in 2020 (when the whole world went off the rails too).
In 2020, after years of steady payouts, it slashed its distribution in half. That’s more than a bit of a red flag…
It’s like a girlfriend of four weeks screaming in the street and throwing the contents of her bag at you after you said you weren’t sure you’d move across the country if she got the job (true story).
A distribution cut is that kind of red flag.
The strange part is that Energy Transfer still generated more than $7 billion in cash flow that year, so it could have afforded to keep the distribution the same.
What this tells me is that the next time things get a little squirrely, Energy Transfer’s management may let the crazy fly.
Today, Energy Transfer generates heaps of cash flow, can easily afford the dividend and is nice to your mother. But if cash flow declines again – or if management is feeling insecure – you may be dealing with a distribution cut and dodging lipstick thrown at your head.
Dividend Safety Rating: C
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