My Honest Opinion of Energy Transfer Stock

Key Points

• While I own a lot of Energy Transfer units, that wasn't by choice.

• The MLP has improved a lot since I initially added it to my portfolio.

• It should have plenty of fuel to continue increasing its distribution in the future.

• 10 stocks we like better than Energy Transfer ›

I own over 100 stocks, many of which pay dividends. Energy Transfer (NYSE: ET) currently clocks in as my third-biggest source of dividend income, at over $700 per year.

Here's my honest assessment of the master limited partnership (MLP).

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How Energy Transfer became one of my largest income-generating investments

Energy Transfer didn't become one of my top income producers by choice. I added the MLP's units to my portfolio in early 2020, right as the pandemic disrupted energy markets. This wasn't due to a bold bet on an eventual market recovery, but rather from a prior put option I wrote to generate income and possibly buy units at a lower price. The options trade seemed to backfire as Energy Transfer units dropped well below my strike price. Making matters worse, the MLP cut its distribution by 50% shortly after I received my units, to retain cash for debt repayment and expansion projects.

Instead of cutting my losses, I opted to hold on to my units of the MLP, which has turned out to be a smart decision. Energy Transfer's value recovered steadily as it repaid debt and rebuilt its distribution payment, driven by growing free cash flow. This improvement gave me the confidence to add to my position a few times in 2023. I received hundreds of additional units of the MLP later that year when it acquired Crestwood Equity Partners, another MLP I had held at the time.

My honest assessment of Energy Transfer

Today's Energy Transfer is a much different company than the one that first entered my portfolio in 2020. It has gone from having a weak financial position to being in the best financial shape of its history. Energy Transfer's leverage ratio is now in the lower half of its 4.0 to 4.5 times target range. Meanwhile, it generated enough cash flow during the first half of this year to cover its distribution to investors (which is now above its pre-pandemic level) by a comfortable 1.9 times, allowing it to retain over $2 billion in excess free cash flow. The MLP now has ample financial flexibility to invest in organic expansion projects and make accretive acquisitions as opportunities arise.

The energy midstream company's improving financial profile has enabled it to grow tremendously over the past five years. It has delivered 10% compound annual growth in its adjusted earnings before taxes, interest, depreciation, and amortization (EBITDA) since 2020. The company has completed a long list of organic expansion projects and made several needle-moving acquisitions, including the Crestwood deal. It's now a much larger-scale and more diversified midstream company.

Energy Transfer still has a lot of growth ahead. The MLP is investing $5 billion into organic expansion projects this year, which should enter service through the end of next year. Meanwhile, it has recently added several new growth capital projects, including the $5.3 billion Desert Southwest Expansion of its Transwestern Pipeline. These projects enhanced its growth profile, extending it through the end of the decade. It has many more projects under development, including the long-delayed Lake Charles LNG project.

The MLP's combination of financial strength and visible earnings growth supports its plan to increase its distribution by 3% to 5% per year. As a result, Energy Transfer will continue to provide me with a steadily growing source of income in the future, even if I don't add to my position.

A solid income-generating investment

While I've only actively purchased a handful of Energy Transfer's units over the years, I'm glad to have received the others via the put option and merger deal. Energy Transfer has become a core income position for me, which isn't likely to change. While I haven't added any more units since 2023, I fully expect to buy more in the future after I build up some other positions to further diversify my income sources. I honestly think it's a terrific long-term investment for anyone who's seeking a durable and steadily rising supply of passive income (and comfortable receiving the Schedule K-1 Federal Tax Form the MLP sends its investors each year).

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