Energy transfer (NYSE:ET) recently announced its latest distribution payment. The Master Limited Partnership (MLP) will pay its investors $0.3225 per unit in November. That’s a slight increase of $0.0025 per unit over last quarter’s level and a 3.2% increase over last year’s payment. It brought the midstream giant’s yield closer to 8%.
The MLP has now increased the payment every quarter since the end of 2021. This upward trend should continue in the future. It allows energy transfer a great one option for those who are looking for a significant and steadily increasing income stream and feel comfortable investing in an MLP that offers its investors a Schedule K-1 federal tax form every year.
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Investments with a higher return often entail a higher risk. However, that is not the case with Energy Transfer. The MLP has a very low risk business model. Approximately 90% of revenue comes from stable, fee-based sources, such as long-term contracts and government-regulated fee structures.
Meanwhile, the MLP has a very conservative payout ratio. It expects to generate approximately $8.5 billion in distributable cash flow annually. With a current distribution rate of roughly $4.5 billion per year, the MLP produces approximately $4 billion in additional free cash flow. That’s more than enough money to cover the growth capital investment plan of about $2.5 to $3 billion per year, with room to spare.
The company currently uses its remaining excess cash to strengthen its position al solid balance sheet. Are leverage ratio tends toward the lower end of the target range of 4.0 to 4.5. The MLP plans to prioritize using the remaining discretionary cash to buy back units once it reaches the lower end of that range.
Energy transfer currently expects growth capital spending this year to be slightly higher than the annual target, between $3 billion and $3.2 billion. This is due to the ability to secure more high-return expansion projects than expected. It has several projects under construction, including a new terminal expansion in the Netherlands, additional gas processing plants, pipeline expansions and several natural gas-fired power stations. The current series of projects should be commercially operational until 2026. This gives the company a lot of insight into future cash flow growth.
The MLP has many more projects in development. The most striking thing is his Lake Charles LNG Project. Other proposed projects include the Blue Marlin oil export terminal, carbon capture and sequestration projects, and blue ammonia projects. Securing these and other projects would add more fuel its profit growth engine.
Meanwhile, the MLP has the financial flexibility to continue consolidating the midstream sector. It recently completed its acquisition of WTG Midstream worth approximately $3.1 billion. The highly strategic and profitable acquisition will add $0.04 per unit to distributable cash flow next year, rising to $0.07 per unit in 2027. That acquisition alone could support MLP’s distribution growth plan for several years to come. The goal is to achieve an annual increase of 3% to 5%, or approximately $0.01 per unit per year.
The acquisition is one of several the company has completed in recent years, expanding its operations and cash flow. Future deals could be to provide the MLP even more fuel to increase its distribution.
Despite its gigantic size, Energy Transfer’s payout takes place on a very sustainable basis. It grows its cash flow, that is allowing the MLP to increase its distribution, invest in expanding its operations and maintain a solid financial foundation. With more growth on the horizon, the MLP should have no trouble continuing to increase its payouts. That makes it a great one option for those looking for an attractive and growing passive income stream.
Consider the following before purchasing shares in Energy Transfer:
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Matt DiLallo holds positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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