Key Factors to Consider Before Investing in Ultra-High-Yield Stock Energy Transfer

Key Factors to Consider Before Investing in Ultra-High-Yield Stock Energy Transfer

If you are looking for high yielding stocks to buy, Energy transfer (NYSE:ET), with its high payout yield of 8.1%, has probably already appeared on your search screens. This large North American midstream energy company helps transport significant quantities of oil and natural gas around the world. But if you are considering buying Energy Transfer, there are three important facts you should consider.

1. Energy transfer is a complex activity

Energy Transfer’s footprint expands across the United States. It breaks down its asset portfolio into five segments: natural gas liquids (NGL) and refined products (28% of adjusted turnover). earnings before interest, taxes and depreciation (EBITDA)), interstate and intrastate natural gas transportation and storage (24%), crude oil (20%), midstream (17%), and what amounts to an “other” category ( 11%). On a positive note, this represents a lot of diversification. But it’s also a lot of complexity.

Key Factors to Consider Before Investing in Ultra-High-Yield Stock Energy Transfer

Image source: Getty Images.

Of note is the “Other” segment, which includes Energy Transfer’s investments in (and control of) a pair of smaller, more focused master limited partnerships (MLPs): Sunoco LP (NYSE: SUN) And Compression Partners in the United States (NYSE:USAC).

Energy Transfer has recently played the role of industry consolidator, rapidly acquiring small midstream operators. It concluded a transaction at the end of 2021, another at the end of 2022, one at the beginning of 2023 and a fourth at the end of 2023.

While one can debate the positives and negatives of all of these things, ultimately it means that the business has a lot of moving parts. And given the pace of its acquisitions, there’s no indication that Energy Transfer wants to reduce that complexity. It is therefore an investment that will require a lot of attention from investors.

2. What happened to the distribution of Energy Transfer?

At the current stock price, Energy Transfer’s distribution yields a whopping 8.1%. This is probably why most investors turn to MLP. But the chart below should worry anyone trying to build a portfolio with reliable income streams. The purple line represents Energy Transfer’s distribution history and includes a sharp decline during the pandemic period. It was a time when oil prices were collapsing and the energy industry as a whole was in a troubled state as large parts of the global economy were temporarily shut down as part of efforts to slow the spread of COVID-19.

ET Dividends Per Share Chart (Quarterly)ET Dividends Per Share Chart (Quarterly)

ET Dividend Per Share Chart (Quarterly)

In all honesty, reducing distribution was probably the right decision in favor of energy transfer. But if you were an investor who relied heavily on the distributions and dividends you received to pay your bills, this would have been painful for you. Note the orange line on the graph above, which represents the distribution history of Enterprise Product Partners (NYSE:EPD), another large, high-yielding midstream MLP. Enterprise continued to increase its distributions throughout this same difficult period. As an income investor, which of these large North American MLPs would you have preferred to own?

3. Energy Transfer has already made decisions unfavorable to unitholders

There is one other minor problem when it comes to energy transfer, although it happened quite a long time ago – at least, by Wall Street standards. In 2015, Energy Transfer agreed to purchase Williams Enterprises (NYSE:WMB). However, the energy sector has seen a period of weakness and Energy Transfer has had cold feet. The company ultimately managed to scuttle the deal, as it likely would have led the company to cut its distribution or take on crushing debt.

Withdrawing from the deal was, once again, probably the right decision in favor of energy transfer. The problem is that, in an effort to get out of the deal, the company issued convertible securities, a significant amount of which went to its then CEO. It was a complex affair, but the convertible securities likely would have shielded the CEO from the impact of reduced distributions if the deal had gone through. This should raise eyebrows among conservative investors when it comes to confidence.

Energy transfer: enter with your eyes wide open

Every investment you can make has risk and every business has a story. The point here is not necessarily to say that you shouldn’t buy Energy Transfer stock. But if you do, you need to go in with a clear understanding of what you’re buying. This is a complex entity and is unlikely to change. Its distribution may not be as secure as one would like, given management’s desire to cut it during the pandemic. And management has, in the past, made other decisions that appear particularly unfavorable to unitholders. This does not mean that such moves will be made again, but if you are or will soon rely on the income generated by your portfolio to help cover your daily expenses, you should not ignore this MLP’s past.

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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.

3 Things You Need to Know Before Buying a Super High Yield Stock Energy Transfer was originally published by The Motley Fool

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