1 Magnificent High-Yield Pipeline Stock Down 20% to Buy and Hold Forever

Energy Transfer (NYSE: ET) has long been a favorite among income investors, and with the stock down roughly 20% from its recent high, the setup now looks even better. The pullback has pushed the stock's yield to nearly 8%. Its distribution is well covered by its distribution cash flow (operating cash flow minus maintenance capital expenditures), while the company has significantly improved its balance sheet over the past several years.

For patient investors looking for steady income and solid growth potential, Energy Transfer stands out as one of the most appealing long-term buys in the pipeline space.

A pipeline giant

Energy Transfer owns one of the largest integrated midstream systems in North America. It transports, processes, and stores natural gas, crude oil, refined products, and natural gas liquids (NGLs) through a vast network that touches nearly every major producing basin in the U.S. Its footprint stretches from the Permian to the Marcellus Shale and connects to key Gulf Coast export hubs.

This scale gives Energy Transfer a major advantage, as it can capture incremental volumes and expand more efficiently than smaller peers. Its vast network of assets also allows it to more easily take advantage of any seasonal or geographic price spread arbitrage opportunities.

While it is an energy stock, Energy Transfer has a very steady, predictable business model. About 90% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) this year is expected to come from fee-based services that are not impacted by energy prices or spreads. The company has also said that it now has the highest percentage of take-or-pay contracts in its history, which means it gets paid regardless of whether customers use its services.

Meanwhile, the master limited partnership (MLP) has done a great job of improving its balance sheet. Back in 2020, it made the hard choice to cut its distribution to reduce debt and fund growth with internal cash flow. Since then, it has steadily lowered leverage and rebuilt distribution coverage, and now its payout is above pre-cut levels.

Last quarter, its distributable cash flow covered the distribution by more than 2 times, leaving plenty of room for future increases. Meanwhile, management expects to keep raising its distribution by 3% to 5% annually, supported by a steady stream of fee-based cash flows and new projects coming online.

Energy Transfer has started to invest heavily to drive its next phase of growth. It plans to spend about $5 billion in capex this year, up sharply from last year, with more than half of that going toward natural gas-related projects.

One of its largest projects is the Hugh Brinson Pipeline, which will move 1.5 billion cubic feet per day of gas from the Permian Basin into Texas to help meet surging power demand from data centers and industrial customers. A second phase of the project will expand capacity and give Energy Transfer even greater flexibility to move natural gas across the region. It also announced the $5.3 billion Desert Southwest pipeline, which will extend Energy Transfer's reach from the Permian into Arizona and New Mexico. Management expects it to be completed by the end of 2029.

These kinds of projects give the company years of visible growth while reinforcing its position as one of the premier operators in the U.S. natural gas market.

Energy Transfer is also getting closer to moving forward with its long-planned Lake Charles LNG project. It has partnered with MidOcean Energy and signed several long-term offtake agreements. LNG (liquified natural gas) demand continues to surge globally, particularly in Asia, and the project could become a significant cash flow driver once approved. At the same time, the company is seeing strong interest from data center developers and utilities looking for a dependable natural gas supply.

Image source: Getty Images.

A cheap stock

Even with all these positives, the stock remains cheap. Energy Transfer trades at about 9 times forward enterprise value-to-EBITDA, well below its historical average and cheaper than most of its peers. Between 2011 and 2016, midstream MLPs typically traded at closer to 13 to 14 times EBITDA, so investors today are paying a much lower multiple for a company that is far stronger than it was a decade ago.

For those seeking a high-yield stock to buy with strong growth potential, Energy Transfer is a great stock to buy and hold for the long term.

Geoffrey Seiler has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.