If you only consider yield, then Energy transfer (NYSE:ET) and its distribution yield of around 8% will far surpass Enterprise Product Partners (NYSE:EPD) and its yield of 7.3%. But there’s more to investing than just yield, and in this situation, most income investors will likely feel much better about holding the low-yield option. Here’s why.
Similar, at least from a global perspective
Both Energy Transfer and Enterprise Products Partners play in the midstream segment of the energy sector. This means they own the pipelines, storage, transportation and processing assets that help connect upstream (energy producers) to downstream (refining and chemicals), effectively contributing to the transportation of oil and natural gas around the world. The key to the midstream sector is that it is largely fee-based, so energy price volatility is less important than energy demand. Energy demand tends to remain robust regardless of energy prices.
Thus, Energy Transfer and Enterprise Products Partners have fairly robust cash flows to support their very large distributions. For example, in 2023, Energy Transfer’s distributable cash flow covered distributions by a whopping 1.9 times. This figure for Enterprise Products Partners was still high at 1.7 times. From this perspective, income-oriented investors could likely view these two high-yielding stocks as interchangeable.
A bit of history that changes history
Investors considering these two master limited partnerships (MLPs), however, need to dig a little deeper. Tackle the easy story first, Enterprise Products Partners has increased its distribution every year for 25 consecutive years. This is an impressive feat considering the volatility inherent in the energy sector. And that includes an increase in 2020 when US oil prices fell below zero at one point. This is important because Energy Transfer cannot make the same claim.
In Q3 2020, Energy Transfer reduced its quarterly distribution from $1.22 per unit to just $0.61 per unit. It’s a 50% haircut when times are tough. This is a conservative decision made at a very uncertain time, as the world faced massive economic shutdowns in 2020 in an attempt to slow the spread of a global pandemic. But that doesn’t change the fact that Energy Transfer reduced its distribution and Enterprise didn’t. If you’re trying to live off the income your portfolio generates, Enterprise’s slightly lower yield probably looks much more attractive right now.
But there is more. In 2015, Energy Transfer agreed to purchase a counterpart Williams Enterprises. He got cold feet and wanted to walk away from the deal, but Williams felt the deal should go through as planned. Energy Transfer warned that closing the deal could result in a reduction in distribution, the need for massive leverage, or both. In its efforts to exit the deal, it issued convertible securities, a significant percentage of which went to then-CEO Kelcy Warren (who is still the largest shareholder and executive chairman). It’s complicated, but the convertibles would have effectively protected the CEO from a reduction in distributions if the deal had gone through. From an investor perspective, it appears that the company has put the CEO ahead of the shareholders. This is a second black spot that should worry investors interested in energy transfer today.
Back on track, but probably not worth buying
Distribution of Energy Transfer is growing again, which is good news. But for investors who rely on the income they receive from their portfolios, the downsides are quite significant. Energy Transfer cut its distribution when many people most needed reliable sources of income. And it potentially put the needs of its CEO ahead of those of its shareholders when faced with a difficult business situation. If you’re looking for income, Enterprise’s slightly lower yield will likely be a better choice for you.
Should you invest $1,000 in energy transfer right now?
Before buying Energy Transfer stock, consider this:
THE Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now…and Energy Transfer was not one of them. The 10 stocks selected could produce monster returns in the years to come.
Consider when Nvidia made this list on April 15, 2005…if you had invested $1,000 at the time of our recommendation, you would have $543,758!*
Equity Advisor provides investors with an easy-to-follow plan for success, including portfolio building advice, regular analyst updates, and two new stock picks each month. THE Equity Advisor the service has more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns as of May 6, 2024
Ruben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
Forget energy transfer; Buy this wonderful high-yielding stock instead was originally published by The Motley Fool
