Purchasing Energy Transfer Equity in the Present Time: Potential Lifelong Profit?
Energy Transfer (ET with a 0.10% stake) has an appealing yield of 6.9%, which is likely to catch the attention of most income investors, considering that the S&P 500 index offers a meager yield of approximately 1.2%. Even the typical yield for energy stocks is lower, around 3.1%.
However, before assuming that Energy Transfer will provide you with a steady income stream for life, it's wise to consider its past.
Energy Transfer's operations appear appealing
Energy Transfer is classified as a midstream company, which means it owns essential energy infrastructure such as pipelines, storage facilities, transportation equipment, and processing assets. These assets are critical to the daily operations of the wider energy industry.
Unlike the upstream (oil and gas production) and downstream (chemicals and refining) sectors, midstream assets are usually unaffected by commodity prices. Customers typically pay fees for the use of these vital infrastructure assets, such as those owned by Energy Transfer.
The reliable stream of fee income is what supports the distributions paid by midstream companies like Energy Transfer, making it an attractive option for income-focused investors.
Moreover, Energy Transfer boasts an investment-grade balance sheet, and its distributable cash flow covered the third-quarter distribution by a substantial 1.8 times.
The company is also diversified, with its business split roughly equally across four different midstream subsectors and a division dedicated to its investments in other midstream businesses. In essence, it appears to be a one-stop shop in the midstream niche.
However, before you dive in, there are historical facts you should consider.
What happens when the energy sector faces challenges?
At first glance, Energy Transfer's fee-driven business should enable it to navigate an energy industry downturn with ease. However, this wasn't the case in 2020, when the pandemic led to a significant decline in energy prices.
During this difficult period, the MLP actually reduced its distribution by half. While this move could be seen as a cautious measure given the uncertainty at the time, it still let down income investors who were looking to Energy Transfer for security.
Other midstream companies managed to maintain or even increase their dividends during that time. Energy Transfer didn't distinguish itself during the previous energy downturn either. In 2016, the MLP attempted to back out of an acquisition it had initiated, citing the potential for a crippling debt pile and a possible dividend cut.
The effort to abandon the deal involved the sale of convertible securities, a significant portion of which went to the then-CEO (now the president of the board of directors). The convertible securities would have protected the CEO from a dividend cut if the deal had gone through, once again leaving investors in the lurch.
Energy Transfer might not be the best choice
The issue with the MLP isn't so much about the business as it is about trust. It has a high yield that appears well-supported, and this distribution has been increasing over time.
But what can an investor expect in times of crisis? This question should rightfully concern you, given Energy Transfer's history. If you're worried, you might want to consider exploring alternatives with better records of prioritizing income-focused investors, such as Enterprise Products Partners (NYSE: EPD) and Enbridge (NYSE: ENB).
Given the historical challenges Energy Transfer has faced during energy sector downturns, such as reducing its distribution by half during the 2020 pandemic and attempting to abandon an acquisition in 2016, investors seeking income-focused options may want to consider alternatives with stronger track records, like Enterprise Products Partners (NYSE: EPD) and Enbridge (NYSE: ENB), which have demonstrated their commitment to maintaining or even increasing their dividends during challenging times. In this context, it's essential to consider the level of trust investors have in a company when making investing decisions, especially in regards to income-focused investments.
