Energy Transfer in 10 Years: What the Long-Term Bull Case Actually Looks Like

Energy Transfer (NYSE: ET) was once a highly aggressive midstream business, making material acquisitions and happy to operate with more leverage than its peers. In 2020, management cut the distribution by 50% as it looked to reduce leverage and chart a different course for the future. Now the goal is to be a boring income investment. Here's what this could mean for investors.

Energy Transfer has an attractive yield

Energy Transfer is a large North American midstream operator that owns assets, including pipelines and energy storage facilities. The master limited partnership (MLP) produces reliable revenues by charging customers for the use of its energy infrastructure. After the business reset in 2020, it is now looking to deliver slow-and-steady growth, driven largely by internal investment opportunities. The plan is for distribution growth of 3% to 5% a year for the foreseeable future.

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That's not an unrealistic goal, noting that peers like Enterprise Products Partners (NYSE: EPD) have basically done the same thing for years. Currently, Energy Transfer's distribution is $1.34 per unit per year. In 10 years, a 3% distribution growth rate would put the distribution at $1.80 per unit per year. At 5%, the distribution would grow to $2.18 per unit per year. Either one should be enough to keep the distribution up with the historical rate of inflation.

But there's another factor to consider here. When a dividend stock increases its dividend, the price normally rises to account for the increase. That keeps the dividend yield roughly the same. Energy Transfer's yield is currently around 6.9%. If the distribution rose but its unit price didn't change, the yield at the end of 10 years would fall between roughly 9% and 11%.

That's not a bad outcome, but it is more likely that the current yield of 6.9% or holds, and the price increases at 3% to 5% a year, along with the dividend. That suggests the current $19 unit price could increase to $25-$30. In other words, Energy Transfer could provide investors with reliable, though perhaps not exciting, capital appreciation and distribution growth.

There's a caveat with Energy Transfer

Peer Enterprise Products Partners has increased its distribution for 27 consecutive years. It has proven to be a reliable, slow-growth income investment. Energy Transfer hasn't done that, again noting its 2020 business reset. As such, Energy Transfer is really most appropriate for more aggressive investors. Conservative dividend investors will probably be better off with Enterprise and its lower, but still attractive, 5.7% yield.

Reuben 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.