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3 Reasons to Buy Energy Transfer Stock Like There’s No Tomorrow
With interest rates likely headed lower over the next few years as the Fed embarks on a rate-cutting cycle, income-oriented investors may be looking for places to invest that can offer higher yields and attractive returns. One such option is an investment in pipeline operator Energy Transfer (NYSE: ET).
The company owns one of the largest integrated midstream systems in the U.S., where it transports hydrocarbons (natural gas, natural gas liquids, and crude) and performs other services across the midstream value chain, such as storage, gathering, processing, and fractionation, among others.
Let’s look at three reasons to buy Energy Transfer stock like there is no tomorrow.
A high yield and increasing distribution
One of the first things that inevitably draws investors to Energy Transfer is the stock’s juicy 7.8% forward yield. The master limited partnership (MLP) currently pays out a $0.32 quarterly distribution, which it plans to grow by between 3% and 5% a year moving forward.
Note that as an MLP, Energy Transfer pays a distribution, not a dividend. While similar, distributions include a return on capital that is untaxed until the units are typically sold, making them tax-deferred. However, investors do receive what is called a K-1 and must fill out some extra tax forms.
While Energy Transfer cut its distribution in half in 2020 to help repair its balance sheet, the distribution is higher today than before the cut. The company’s balance sheet is currently in good shape, with leverage (as used by rating agencies) toward the low end of its 4.0x to 4.5x target range.
At the same time, Energy Transfer’s distribution is well covered, as reflected in its over 1.8 times distribution coverage ratio in the second quarter. This is based on its non-consolidated distributable cash flow, which is its cash flow before growth capital expenditures (capex). Energy Transfer has partial stakes in a few companies, so the non-consolidated number is the cash flow it gets to keep.
Overall, Energy Transfer has a high, well-covered yield with a distribution that should continue to grow.
Growth opportunities
In addition to its nice yield, Energy Transfer has solid growth opportunities in front of it. The company has one of the midstream sector’s largest backlogs, with several projects set to go into service next year and the year after.
It plans to spend around $3.1 billion on growth projects this year. The company typically looks for at least a 12% return on its spending, which would help boost earnings before interest, taxes, depreciation, and amortization (EBITDA) by more than $370 million per year once all the projects are fully ramped up.
Energy Transfer is also well positioned to deliver natural gas to help supply the increasing energy needs of artificial intelligence (AI)-focused data centers. AI data centers use an enormous amount of energy, and these companies need reliable, cheap, and uninterruptible energy. Nuclear energy and natural gas are the best ways to provide this.
While cloud computing companies are starting to turn to nuclear energy, most of these projects are at least several years away. Meanwhile, Energy Transfer has been signing deals with power companies to supply more natural gas based on increasing AI demand and has had discussions with cloud computing companies looking to build onsite power generation.
Taken altogether, Energy Transfer has solid growth opportunties in front of it over the next several years.
Inexpensive stock
Despite Energy Transfer’s valuable midstream system, growth opportunities, and solid financial footing, its stock trades at one of the lowest valuations in the MLP midstream space.
Typically, investors value midstream companies using an enterprise-value-to-EBITDA (EV/EBITDA) multiple. The reason for this is twofold. The first is that enterprise value takes into consideration the amount of net debt a company carries on its balance sheet. These are capital-intensive businesses, so operators in the space typically carry debt to help fund their projects.
EBITDA, meanwhile, excludes non-cash depreciation expenses that would otherwise be included with earnings. Midstream companies spend money upfront on projects through capex, and those expenses are then depreciated over the useful life of the asset. By using EV/EBITDA, the costs of the projects are captured in its debt net, while EBITDA is more reflective of the company’s current operating profitability.
Based on this metric, Energy Transfer trades at an EV/EBITDA of 8.1 times based on 2025 estimates, well below its historical levels and one of the lowest valuations in the MLP space.
The midstream MLP sector as a whole, meanwhile, trades at a pretty large discount to where it did several years ago, with the industry trading at a 13.7 times average EV/EBITDA multiple between 2011 and 2016. With the industry as a whole in better financial shape than during this period, the sector could re-rate higher in the coming years if the midstream companies can show themselves to be AI energy winners.
Overall, given Energy Transfer’s current valuation and growth prospects, together with an attractive yield and growing distribution, the stock looks like a buy.
Should you invest $1,000 in Energy Transfer right now?
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Geoffrey Seiler has positions in Energy Transfer, Enterprise Products Partners, and Western Midstream Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
3 Reasons to Buy Energy Transfer Stock Like There’s No Tomorrow was originally published by The Motley Fool
Sales of existing homes fell in September as house hunters remained on the fence about buying a home despite mortgage rates easing during the month.
Existing home sales slipped 1.0% from August’s tally to a seasonally adjusted annual rate of 3.84 million, the National Association of Realtors said Wednesday. That marked the lowest rate since October 2010. Economists polled by Bloomberg expected a pace of 3.88 million in September.
On a yearly basis, sales of previously owned homes were 3.5% lower in September. The median home price rose 3.0% from last September to $404,500, marking the 15th consecutive month of annual price increases.
“Home sales have been essentially stuck at around a 4 million-unit pace for the past 12 months,” NAR chief economist Lawrence Yun said in a press release.
There have been significant challenges that have weighed on sales activity, including a lack of inventory, escalating prices, and elevated mortgage rates. Last month, however, those factors turned around.
The Federal Reserve cut its benchmark rate by half a percentage point in September. While the central bank doesn’t set mortgage rates, its actions influence their direction of movement.
Mortgage rates hit the lowest level since February 2023 ahead of the Fed decision to ease, while listing inventory picked up.
But overall, that hasn’t been enough to entice buyers.
“Some consumers are hesitating about moving forward with a major expenditure like purchasing a home before the upcoming election,” Yun said.
Tesla (TSLA) reported mixed third quarter results after the bell on Wednesday, but the stock jumped in after-hours trading as investors cheered the earnings beat, higher gross margins, and news that Tesla’s cheaper EV is on track for production next year.
For the quarter, Tesla reported revenue of $25.18 billion vs. $25.4 billion per Bloomberg consensus, higher than the $25.05 billion it reported in Q2 and also topping the $23.40 billion Tesla reported a year ago. Tesla posted adjusted EPS of $0.72 vs $0.60 expected, on adjusted net income of $2.5 billion and free cash flow of $2.9 billion.
The closely watched gross margin figure came in at 19.8%, much higher than the 16.8% expected.
Tesla shares were up nearly 8% in after hours trade.
“We delivered strong results in Q3 with growth in vehicle deliveries both sequentially and year-on-year, resulting in record third-quarter volumes,” the company said in its earnings deck. “Preparations remain underway for our offering of new vehicles — including more affordable models — which we will begin launching in the first half of 2025.”
Earlier this month, Tesla (TSLA) announced third quarter deliveries that slightly missed expectations, sending the stock lower.
Tesla said it delivered 462,890 vehicles in Q3, up 6.4% quarter over quarter, to mark the first quarter of delivery growth this year. The numbers also came in ahead of the 435,059 EVs the company delivered in the year-ago period. But Wall Street had expected Tesla to deliver closer to 463,897, according to Bloomberg.
“Refreshed Model 3 ramp continued successfully in Q3 with higher total production and lower cost of goods sold quarter-over-quarter. Cybertruck production increased sequentially and achieved a positive gross margin for the first time,” Tesla said in its report.
Tesla said it expects vehicle deliveries to achieve “slight growth” in 2024.
Ahead of Tesla’s Q3 disclosure, shares were down approximately 11% since Tesla revealed its robotaxi, dubbed the Cybercab, at its showy “We, Robot” event from the Warner Bros. studio lot in Burbank, Calif., on Oct. 10.
The debut and release of a cheaper EV is what many analysts and industry watchers believe will spur the next leg higher of EV sales, as even CEO Elon Musk has said before. During its Q2 report, Tesla and Musk said the company remains on track for the production of new vehicles, likely including a cheaper EV, in the first half of next year.
Investors and analysts were left wanting more details from Tesla’s “We, Robot” event on the Cybercab itself and detailed testing plans, along with questions about the development of Tesla’s sub-$30,000 EV, dubbed the Model 2.
Transak disclosed a data breach affecting over 92,000 users after a phishing attack compromised an employee’s laptop.
CryptoCurrency
The Dow plummets more than 600 points and is on track for its worst day in more than a month
The Dow Jones Industrial Average and other major indexes suffered a steep decline Wednesday afternoon as the yield on the benchmark 10-year U.S. Treasury note continued its upward climb, reaching 4.23%—a level not seen since July.
In the afternoon, the Dow dropped 631 points, or 1.4%, heading for its worst day in over a month. Meanwhile, the tech-heavy Nasdaq and the S&P 500 declined by 2.2% and 1.4%, respectively. However, there was some relief for investors as oil prices eased, with West Texas Intermediate (WTI) futures trading around $70.65 per barrel.
The Federal Reserve’s Beige Book, released in the afternoon, reported that economic activity remained largely unchanged across the 12 Federal Reserve Districts, with the Southeast significantly impacted by a harsh storm season.
On Wednesday, all eyes are on Tesla (TSLA) as the company prepares to release its latest earnings report. Analysts expect earnings per share to be 60 cents, down from 66 cents a year ago but an improvement from 52 cents in the previous quarter, according to FactSet estimates. Revenue is projected to hit $25.4 billion, compared to $23.3 billion in the third quarter of 2023 and $25.5 billion in the preceding quarter.
Apart from Tesla, investors are closely monitoring earnings reports from other major corporations, including AT&T (T), Boeing (BA), and Coca-Cola (KO).
McDonald’s stock plunges over 5%
McDonald’s (MCD) shares took a sharp hit, falling over 5% after the Centers for Disease Control and Prevention (CDC) linked the chain’s Quarter Pounder burgers to an E. coli outbreak. The outbreak has led to 10 hospitalizations and one death, driving a significant decline in McDonald’s stock during the afternoon trading session.
As of now, 49 cases have been reported across 10 states between Sept. 27 and Oct. 11, with a majority of illnesses occurring in Colorado, Nebraska, Utah, and Wyoming. The CDC noted that most of those affected had eaten a Quarter Pounder. Investigators are working swiftly to identify the contaminated ingredient.
Spirit Airlines stock soars 30%
After a failed attempt at merging with JetBlue (JBLU-0.80%), ultra-low-cost carrier Spirit Airlines (SAVE+28.01%) is reportedly turning back to a familiar partner. The Wall Street Journal (NWSA-0.34%), citing people familiar with the matter, reports that Spirit and Frontier Airlines (ULCC+3.05%) are in early talks over a potential merger. The news sent Spirit’s stock soaring nearly 30% on Wednesday.
–Francisco Velasquez and Rocio Fabbro contributed to the article
The semi-autonomous region of Tanzania is taking advantage of a sandbox regulatory framework adopted in July.
Bitcoin’s correction ignited selling in altcoins, which are slipping below critical support levels.
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