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Ben Reynolds
Ben Reynolds
Articles (746)  | Author's Website |

This MLP Yields 6.6% and Pays a Dividend in August

Analyzing the investment prospects of Energy Transfer Equity

August 08, 2018 | About:

Investors interested in stocks that pay a dividend in August should consider master limited partnerships, otherwise known as MLPs. It is highly common for MLPs to pay a distribution in August. One example is Energy Transfer Equity LP (ETE), a high-quality MLP with a 6.6% yield. Energy Transfer declared its third-quarter distribution on July 26, and will pay the distribution on Aug. 20.

Not only is Energy Transfer a high-yielding August dividend stock, but it also has attractive growth potential and is trading at an attractive price. Total returns, including dividends, could exceed 15% per year over the next five years.

Steady business model pumping out cash flow

Energy Transfer Equity operates in the midstream industry of the energy sector. Its business model is storage and transportation of natural gas, natural gas liquids, refined products and crude oil through pipelines and terminals. Energy Transfer Equity owns the general partner and 100% of the incentive distribution rights of Energy Transfer Partners LP (NYSE:ETP) and Sunoco LP (NYSE:SUN). The company also acquired the General Partner and 12.5 million common units of USA Compression Partners LP (NYSE:USAC).

Energy Transfer Partner’s assets include over 70,000 miles of pipelines, while Sunoco distributes motor fuel to over 9,000 convenience stores, independent dealers, commercial customers and distributors. Energy Transfer Equity also owns Lake Charles LNG Co.

Energy Transfer Equity struggled from 2014 to 2016, along with the entire energy sector, from the downturn in the oil and gas market. Fortunately, commodity prices have recovered significantly since then, and Energy Transfer’s first-quarter financial results showed continued growth. Quarterly revenue of $11.9 billion increased by 23% from the same quarter a year ago, while adjusted distributable cash flow soared 84%. High growth rates of revenue and cash flow allow Energy Transfer Equity to invest in growth initiatives and pay a compelling yield to investors.

Growth fuels Energy Transfer’s high yield

Energy Transfer Equity’s key growth catalysts are new projects for its subsidiary companies. For example, the company has announced plans to construct a new oil pipeline in the Permian Basin, which will have total capacity of up to 1 million barrels per day. The company expects the pipeline to be completed by 2020. Another important growth initiative is the Rover project, which transports natural gas from the Marcellus and Utica Shale areas to markets across the U.S. Rover has storage capacity of 3.25 billion cubic feet per day.

Acquisitions are also a key part of Energy Transfer Equity’s growth plan. On Aug. 1, the company announced it will acquire its Energy Transfer Partners subsidiary. The deal will be immediately accretive to Energy Transfer Equity’s cash flow and will help simplify its corporate structure and strengthen its balance sheet. This will also help increase Energy Transfer Equity’s distribution coverage. The company expects to have a distribution coverage ratio of 1.6 times to 1.9 times after the acquisition closes, which is expected to happen in the fourth quarter.

Energy Transfer Equity units trade for a price-to-EBITDA ratio of 3; fair value should be 4 given the company’s accelerating growth potential. Expansion of the stock valuation could add 5.9% to the company's annual returns. In addition, the company could easily grow earnings before interest, taxes, depreciation and amortization by 4% per year as it has multiple growth projects ramping up or to be completed in the near future. Lastly, Energy Transfer Equity has a 6.6% distribution yield. The combination of valuation expansion, EBITDA growth and distributions is expected to result in annual returns of 16% to 17% per annum over the next five years.

Disclosure: I am long ETP.

About the author:

Ben Reynolds
I run Sure Dividend, a website that finds high quality dividend stocks for long term investors using the 8 Rules of Dividend Investing.

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