3 No-Brainer High-Yield Pipeline Stocks to Buy With $1,000 Right Now

3 No-Brainer High-Yield Pipeline Stocks to Buy With ,000 Right Now

For investors looking for income, there may be no better sector to consider than pipelines. Companies in the sector are in their best financial position in years, while their valuations trade well below pre-pandemic levels.

In fact, the sector typically trades at around 13.7 times the average. enterprise value (EV)– to the EBITDA multiple between 2011 and 2016, while today most stocks in the midstream sector trade at less than 10 times. EV/EBITDA tends to be the most widely used metric for valuing midstream companies because it takes into account their debt positions and excludes non-cash expenses.

Let’s look at three obvious stocks to buy in the sector that will provide you with both a distribution revenue stream as well as strong price appreciation potential.

West of the intermediate sector

After announcing a whopping 52% increase in its distribution, West of the intermediate sector (NYSE:WES) has one of the highest returns in the midstream industry. The company increased its quarterly distribution to $0.875 per unit, up from $0.575 a quarter earlier. Based on its new payout, the stock now yields 9.3%.

Better yet, the company recently reported record first-quarter adjusted EBITDA of $608.9 million, up 22% year-over-year. Western recorded record throughput of natural gas in its networks. The company has a strong presence in the Delaware Permian, the most prolific oil basin in the United States. However, it is also seeing a resurgence in Colorado’s Denver-Julesburg (DJ) basin, with the number of wells nearly doubling from last year.

The company ended the first quarter with 3.3x leverage (net debt/adjusted EBITDA) and is on track to reach 3x by the end of the year. At this point, Western has expressed a willingness to pay enhanced distributions on top of its already strong core distribution. Given the company’s strong balance sheet and distribution coverage ratio, 2025 should see the company pay out distributions above its already strong quarterly payout of $0.875.

Trading at just a 9x forward EV/EBITDA multiple, Western stocks are a no-brainer for income-focused investors.

3 No-Brainer High-Yield Pipeline Stocks to Buy With ,000 Right Now

WES EV to EBITDA chart (forward)

Enterprise Product Partners

One of the best managed intermediary operators, Enterprise Product Partners (NYSE:EPD) has been a model of consistency over the past two decades. Over the course of different economic and energy cycles, it has increased its distribution for 25 consecutive years.

The company is in good financial health, with modest leverage of just 3x for the industry. Meanwhile, it currently pays a quarterly distribution of $0.515 per unit, which represents an increase of 5.1% from last year. That’s good for a yield of 7.2%.

Gas pipeline.Gas pipeline.

Image source: Getty Images.

What’s even more exciting for investors is that Enterprise is starting to accelerate its growth after holding it back coming out of the pandemic. After reducing its growth capital expenditures (capex) to just $1.4 billion in 2022, the company increased it to $3.5 billion in 2023 and plans to spend around $3.5 billion this year also. Projects take time to build and then ramp up, so the benefits of this spending should begin to materialize in the coming years.

Meanwhile, after five years of waiting, Enterprise has just received an important license that will allow it to move forward with its proposed Marine Oil Terminal (SPOT). SPOT could be a game-changing project that would make Enterprise a major player in crude exports.

With this master limited partnership (MLP) trading at just 9.3 times on a forward EV/EBITDA basis, now is a great time to invest in the stock.

EPD EV to EBITDA chart (forward)EPD EV to EBITDA chart (forward)

EPD EV to EBITDA chart (forward)

Energy transfer

Energy transfer (NYSE:ET) is the cheapest of the three midstream stocks, although it arguably has some of the best assets. Its broad, integrated system, created through growth projects and acquisitions, touches almost every aspect of midstream business. This gave the company enormous scale. Simply put, the company’s vast interconnected system allows it to find the best prices for moving its products. This can be done by storing hydrocarbons (crude, natural gas and natural gas liquids) for use at more attractive times, upgrading the products into something more valuable or shipping them to markets at more attractive prices .

Energy Transfer is building a midstream empire and isn’t shying away from it. However, this caused the company to get back on its skis in 2020, when it had to cut its distribution in half to help improve its balance sheet.

However, the company has not only brought its distribution back to previous levels, but it is now higher than it was before the reduction. In the meantime, its balance sheet, while not as strong as Enterprise’s or Western’s, has been repaired, and the company is smartly generating free cash flow in excess of its distributions. This is a strong sign that it will not encounter the problems it experienced in 2020, when it put excessive effort into expanding.

Trading at just 7.4 times forward EV/EBITDA, the new and improved power transfer is currently one of the biggest deals in the industry. The company is experiencing solid growth and is increasing its distribution, but in a more responsible manner while continuing to reduce its debt. This makes the stock an attractive buy.

ET EV to EBITDA chart (forward)ET EV to EBITDA chart (forward)

ET EV to EBITDA chart (forward)

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Geoffrey Seiler holds positions in Power Transfer, Enterprise Product Partners and Western Midstream Partners. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

3 Obvious High Yield Pipeline Stocks to Buy with $1,000 Right Now was originally published by The Motley Fool

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