Should You Buy Energy Transfer While It's Below $19?

Key Points

• Income investors should love Energy Transfer at the current price.

• Value investors will likely be interested in the stock, too.

• While Energy Transfer has solid growth prospects, the stock probably won't be all that appealing to growth investors.

• 10 stocks we like better than Energy Transfer ›

Energy Transfer LP (NYSE: ET) hasn't been a great investment this year. The midstream energy stock is down more than 10% while the overall market has bounced back strongly.

However, pullbacks like this often present great buying opportunities for patient investors. Should you buy Energy Transfer while it's below $19?

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A resounding "yes" for income investors

I think the answer to that question is a resounding "yes" if you're an income investor. Energy Transfer ranks among the top income generators with its forward distribution yield of 7.49%.

Granted, the master limited partnership (MLP) doesn't boast a stellar track record of distribution increases like some of its peers. That's because Energy Transfer cut its distribution in 2020 in the wake of the start of the COVID-19 pandemic.

However, the midstream leader quickly resumed boosting its distribution. Within two years, Energy Transfer was paying distributions at the same level as before the cut. Today, the distribution is even higher.

There's more good news for income investors, too. Energy Transfer targets annual distribution growth of between 3% and 5%. You shouldn't have to worry about inflation eroding the power of the income you receive with that level of growth.

Can the MLP deliver on this targeted distribution growth? I think so. Energy Transfer is in the strongest financial position in its history. Its leverage ratio is in the bottom half of the target range. The company continues to maintain solid distribution coverage.

Image source: Getty Images.

Another affirmative answer for value investors

Value investors should have good reasons to buy Energy Transfer while it's below $19 as well. It's not just that the stock is roughly 17% below its 12-month high. The MLP's valuation looks attractive based on key metrics.

Energy Transfer's trailing 12-month price-to-earnings ratio of 13 is well below its historical average. It's also slightly below the average over the last 10 years, a period that includes the oil price collapses of 2015 and 2016 and the COVID-19 pandemic.

The company's forward price-to-earnings ratio is 11 looks even more appealing. Sure, this number is roughly in line with the forward earnings multiples of Energy Transfer's peers. However, I think this simply shows that the entire midstream industry is attractively valued right now.

Where Energy Transfer really shines is with its trailing 12-month enterprise value-to-EBITDA ratio. In June, the company's analysis found that its EV-to-EBITDA was the second-lowest in the midstream industry.

An iffy response for growth investors

Will growth investors want to buy Energy Transfer? Maybe, but probably not.

It's not that the company won't be able to grow. Energy Transfer operates more than 130,000 miles of pipeline that transport crude oil, natural gas, natural gas liquids (NGLs), and refined products throughout much of the U.S. The demand for these fuels will likely increase over the coming years despite the increased use of renewable energy sources.

Energy Transfer is investing heavily to support higher demand, including around $5 billion in 2025 alone. The company is expanding processing facilities in the Permian Basin. It's building the Hugh Brinson pipeline that will transport natural gas from West Texas processing facilities to existing pipelines south of the Dallas-Fort Worth area. The company is almost finished with expanding NGL export capacity at its Nederland terminal. And those are just a few of its capital projects underway.

Artificial intelligence (AI) has emerged as a key growth driver for midstream energy companies. The data centers that host AI models consume enormous amounts of electricity, much of which is generated using natural gas. Energy Transfer is building eight 10-megawatt facilities in Texas to support this AI demand. The company is also in a long-term agreement with CloudBurst Data Centers to provide natural gas to its AI data center in central Texas.

Even with these opportunities, though, I doubt that growth investors will find Energy Transfer an exciting stock to buy. Its growth prospects don't stack up well against high-flying tech stocks. However, the MLP's growth should be a nice bonus for income and value investors.

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