Targa Resources (NYSE: TRGP) tends Unpleasant are easily overlooked. Pipeline giants Energy transfer And Partners for business products overshadow this in the midstream industry. That’s why many investors probably missed the share price crash S&P500 (SNPINDEX: ^GSPC) this year. The midstream company is up more than 30% this year, about three times the gains of that broader market index.
Targa could have just started. The company expects to generate revenue considerable more free cash flow in 2025, fueled by upcoming completion of expansion projects. That’s why the pipeline stock could have the fuel to continue the rally.
Preparing for a re-acceleration
Targa Resources sets a record in 2023. The midstream company grew its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) by 22% to a record of more than $3.5 billion. It delivered record Permian year-round natural gas liquids (NGL) transportation, fractionation and liquefied petroleum gas (LPG) export volumes in 2023. The company benefited from higher NGL supplies through its collection and processing systems and those of third parties. It also got a boost from the recent expansion of its LPG system and improved market conditions.
The midstream company expects to continue growing this year. It sees adjusted EBITDA rising about 8% to between $3.7 billion and $3.9 billion. It should continue to benefit from strong market conditions and recently completed expansion projects. Targa recently completed and commences operations on its new Wildcat II processing plant in the Permian Basin upwards yet another new fractionator.
The company plans to invest $2.3 billion to $2.5 billion in expansion projects this year. These projects will be commissioned in the coming quarters. That drives the belief that capital spending will fall by about $1 billion next year. Those lower capital expenditures and rising revenues from recently completed projects should drive a meaningful increase in free cash flow in 2025.
Boosting cash returns
Targa Resources already generates a lot of free cash flow after financing expansion projects. That gives the country the money it can return to shareholders through dividends buy back shares. The company spent a record $373.7 million on share buybacks last year. The company has continued to gobble up its stock this year, buying back another $124 million in the first quarter.
The company also announced a massive 50% dividend increase this year. Targa increases annualized interest to $3.00 per share, yielding a 2.6% prepayment dividend yield at the recent share price. That’s double the S&P 500’s 1.3% dividend yield.
Targa’s dividend could continue to grow significantly in the coming years. Free cash flow will see a meaningful boost in 2025 as several expansion projects currently under construction come online and capital expenditures decline. Although the country expects investment spending to decline next year, this is still the case a lot of grow forward. Due to strong customer demand, Targa recently approved the construction of a new natural gas processing plant in the Permian Basin, which should be operational in the fourth quarter of next year. The company also approved construction of a new NGL fractionator that it expects to complete in the third quarter of 2026. These projects will provide the company with incremental cash flow when they come online, potentially providing more fuel for future dividend increases.
Lots of fuel to continue growing the dividend
Targa Resources has quietly delivered market-crushing returns this year. It benefits from strong market conditions and expansion projects, which are driving record volumes and profits. With more projects in the pipeline, Targa’s cash flow should continue to rise. That would give it the fuel to further increase its dividend and buy back its shares. Those catalysts could do that Targa provided the power to continue generating market-crushing total returns. That’s why investors might want to take a closer look at Targa.
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Matt DiLallo has positions in Energy Transfer and Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners and Targa Resources. The Motley Fool has a disclosure policy.
This Little-Known Dividend Stock Is Crushing the S&P 500 This Year (and Could Have Plenty of Fuel to Continue Rising in 2025) was originally published by The Motley Fool
