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Is Energy Transfer the Smartest Investment You Can Make Today?
Key Points
Energy Transfer pays a lucrative distribution supported by stable cash flow and a strong financial profile.
The MLP has lots of growth coming down the pipeline.
It currently trades at one of the lowest valuations in its peer group.
Energy Transfer (NYSE: ET) offers investors a high-yielding distribution (currently around 7.5%) backed by a rock-solid financial profile. The master limited partnership (MLP) is also growing at a healthy rate, which should continue. To top it off, the company trades at a very attractive valuation.
Let's examine these features to determine whether they make Energy Transfer the smartest investment you can make today.
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A rock-solid income stream
Energy Transfer's diversified midstream business generates substantial and stable cash flow, with fee-based contracts backing about 90% of the MLP's annual earnings. During the first quarter, the company produced $2.3 billion of distributable cash flow. It distributed a little over $1.1 billion of this money to investors, retaining the rest to invest in expansion projects and maintain its strong financial profile.
This conservative payout ratio allowed the MLP to maintain its leverage ratio in the lower half of its target range of 4 to 4.5 times. That has the company in its strongest financial position in its history.
This strong financial profile makes the MLP's payout highly durable.
A fully fueled growth engine
Energy Transfer also has a healthy growth profile. The MLP is on track to grow its earnings before interest, taxes, depreciation, and amortization (EBITDA) by around 5% this year. Growth drivers include last year's acquisition of WTG Midstream, recently completed organic expansion projects, and healthy market conditions.
The MLP has even more growth ahead. It's investing $5 billion into growth capital projects this year, including several gas processing plants, a major new natural gas pipeline, and some additional export capacity. These growth projects should come online in the second half of 2025 through the end of next year. Given that timeline, Energy Transfer expects these projects will boost its earnings growth rate in the 2026 to 2027 time frame. That provides the MLP with lots of near-term visibility into its earnings growth.
Additionally, Energy Transfer is developing several expansion projects, including its Lake Charles LNG facility and a new gas supply line for an AI data center. The MLP has identified three major catalysts -- rising Permian production, increasing gas demand from emerging sectors such as AI data centers, and growing export demand for natural gas liquids -- that will provide it with numerous opportunities to continue expanding its midstream footprint in the years to come. Its ability to secure more new projects would further enhance and extend its earnings growth outlook.
Energy Transfer's strong financial position also enables it to continue making accretive acquisitions that complement its operations and growth. The MLP has a long history as a consolidator in the midstream sector, often making at least one major deal each year. Visible earnings growth from its upcoming projects and future expansion opportunities supports the company's plan to deliver 3% to 5% annual distribution increases.
All this for an attractive value
Despite its strong growth and financial profiles, the MLP currently trades for an enterprise value (EV)-to-EBITDA ratio of less than 9. That's the second-lowest valuation among energy midstream companies, where the peer group average is around 12.
This low valuation is a key reason for Energy Transfer's high distribution yield, which enhances its appeal compared to peers.
A wise choice
Energy Transfer offers a high-yielding distribution and has a strong growth profile. It's also in the best financial shape of its history and has a valuation near the bottom of its peer group. These features make the MLP look like a very attractive investment these days, as it could deliver strong total returns. It's especially smart for those seeking a lucrative and growing passive income stream with potential tax benefits from the Schedule K-1 Federal Tax Form that the MLP sends investors each year.
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Matt DiLallo has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
