The Williams Companies (NYSE:WMB) is a well-managed midstream company that offers shareholders the opportunity to earn a stable and well-sustained yield of 5.1%. The Williams Companies operate a diversified pipeline business and generate a ton of cash flow that supports a growing dividend. Williams Companies’ acquisition of MountainWest Pipelines Holding Company, completed in the first quarter of fiscal 2023, began to make positive contributions to adjusted EBITDA. I also expect The Williams Companies to increase its dividend by approximately 5% in fiscal 2024, which would bring the forward dividend yield to approximately 5.4%!
I last worked on The Williams Companies in January, when I recommended purchasing the midstream company as part of the MountainWest Pipelines Holding Company acquisition: The Williams Companies: Buy This Solid 5.4% Mid Yield. The intermediary company acquired MountainWest’s natural gas transportation and storage assets at the time complemented its strategic footprint. Given that the midstream company continues to grow its adjusted EBITDA/distributable cash flow and has very good dividend coverage, I view WMB as one of the top dividend growth players for 2024.
High single-digit adjusted EBITDA growth
The Williams Companies are growing rapidly, primarily through acquisitions. The midstream company announced the acquisition of MountainWest Pipelines Holding Company’s 2,000-mile interstate natural gas pipeline system in Utah, Wyoming and Colorado for $1.5 billion (enterprise value) in December 2022 The acquisition has already had a positive impact on WMB’s financial results for the 2023 financial year and gradually added to the company’s adjusted EBITDA.
Through the first nine months of the year, The Williams Companies generated adjusted EBITDA of $5.1 billion, representing 9% year-over-year growth, with growth primarily driven by assets of the company’s natural gas.
The Williams Companies is a natural gas-focused midstream company with substantial pipeline assets located throughout the United States. The midstream company plays a crucial role in connecting natural gas exploration areas in the Haynesville, Permian and Eagle Ford basins (to name a few) to the end consumer. -the steps. The midstream company is growing primarily through acquisitions and just announced it will purchase a portfolio of Gulf Coast natural gas storage assets for $1.95 billion (Source).
By far the largest segment is Transmission and Gulf of Mexico, which accounted for approximately 46% of the company’s third-quarter EBITDA. Northeast Gathering and Processing, which connects customers to the Marcellus Basin, is The Williams Companies’ second business driver. Both segments therefore saw the largest year-over-year increases in adjusted EBITDA in the third quarter of 2023 and year-to-date.
The Williams Companies is a dividend growth play
In the third quarter, Williams Companies forecast adjusted EBITDA of $6.6 billion to $6.8 billion, compared to a prior outlook of $6.4 billion to $6.8 billion, meaning the low end of the range was increased by $200 million.
The midstream company also projects considerable dividend coverage, based on adjusted funds from operations, in fiscal 2023: WMB projects a dividend coverage ratio of 2.34X, up from 2.25X. This increase is due to the company benefiting from additional EBITDA growth related to the acquisition of natural gas assets earlier this year. With a dividend coverage ratio of 2.3X, WMB’s 5% dividend yield is about as safe as it gets and, importantly, investors should also expect to receive a nice increase next year.
Williams Companies mainly play on a growing dividend over time. In fiscal 2023, the midstream company increased its dividend by 5% to $0.4475 per share per quarter. I expect a similarly sized dividend increase for fiscal 2024 and therefore estimate that the forward dividend yield for WMB will reach 5.4%.
I value midstream companies primarily based on the enterprise value/EBITDA ratio, because the valuation metric takes into account the presence of significant amounts of debt (typical in capital-intensive midstream businesses) and non-cash depreciation expense. Williams Companies currently has an EV/EBITDA ratio of 10.2X, which is slightly higher than the one-year average EV/EBITDA ratio of 9.7X.
The valuation is also slightly higher (but not by much) than the EBITDA multipliers of other midstream companies like Enterprise Products Partners (EPD) and Kinder Morgan (KMI) which trade at around 9.3 to 9.4 times forward EBITDA. WMB’s strong distribution growth, EBITDA predictability and aggressive acquisition stance are likely the reasons for a slightly above-average valuation. Besides The Williams Companies, I also like Enterprise Products Partners because the midstream company is a distribution champion and the units are an important purchase for me: I buy this fist with an intermediate yield of 8%.
Risks with Williams Companies
The greatest risk to The Williams Companies is regulation that stifles the growth and development of the natural gas industry. New regulations limiting the pipeline industry’s potential for expansion would negatively impact The Williams Companies’ ability to grow its cash flow and adjusted EBITDA. Ultimately, this could mean that the midstream company will not be able to maintain its attractive mid-single-digit annual dividend growth rate.
The Williams Companies is a well-managed midstream company and the company’s acquisition of MountainWest Pipelines Holding Company earlier this year has already had a positive impact on its finances. Williams Companies is seeing high single-digit adjusted EBITDA growth and expects a dividend coverage ratio of 2.35X for fiscal 2023, which also suggests the midstream company is going to give a decent raise to shareholders next year. Given that The Williams Companies has managed to grow its dividend consistently in the past, I continue to view WMB as an attractive dividend growth play for FY 2024!