Energy Transfer's 2020 Dividend Cut Still Haunts Some Investors. Here's Whether That Risk Is Still Real.

"Once bitten, twice shy" is a common idiom that refers to a person who was hurt or disappointed once being much more cautious or hesitant to try something again (it's the title of a song originally released in 1975 that gained some commercial success when it was covered in 1989).

"Once bitten, twice shy" is also an idiom common to dividend investors, who, after enduring one dividend cut from a company, are reluctant to allocate their hard-earned capital to those shares again.

So it's understandable that Energy Transfer's (NYSE: ET) 2020 payout cut, one largely brought on by the need to conserve capital during the coronavirus pandemic, still weighs on some equity income investors.

Following a 2020 cut, Energy Transfer's dividend is again growing and safe. Image source: Getty Images.

Investors should remember that with any dividend stock, there's no such thing as a 100% guarantee against possible cuts. Several now-former Dividend Kings, or firms with dividend-increase streaks of at least 50 years, have been permanently shunned for paring payouts. For investors considering Energy Transfer, the good news is that a 2020 repeat isn't imminent and appears unlikely in the long term.

Mending dividend fences

Following the October 2020 payout reduction, Energy Transfer's annualized dividend slumped to $0.61 a share, or half the prior distribution. Fortunately, that didn't last long. By the fourth quarter of 2021, the midstream company's annualized dividend had risen to $0.70 per share, marking the beginning of a renewed commitment to payout growth.

Sporting a yield of 6.8%, Energy Transfer now has a streak of dividend increases spanning 19 quarters, or almost five years. No, that doesn't erase a prior distribution cut, but that run goes a long way toward restoring investors' confidence that this pipeline operator is committed to payout growth and safety.

Speaking of safety, the data confirm it's a long shot that Energy Transfer will be a dividend offender again anytime soon. At the end of the second quarter, the energy company had a distributable cash flow (DCF) coverage ratio of 2.2, implying the dividend isn't a burden. DCF is an important metric because it measures pipeline companies' cash generation relative to how much of that cash is paid out as dividends.

Investors who are experienced with master limited partnerships (MLPs) such as Energy Transfer know that, at a minimum, coverage ratios below 1 are potential warning signs. In contrast, ratios above one are the place to be. Energy Transfer more than doubles the preferred coverage ratio.

Debt trending the right way

One of the hallmarks of companies that deliver dividend dismay is high debt. Midstream is a capital-intensive industry, so it's not uncommon for operators to carry liabilities that appear significant. To that end, what matters are the debt ratios.

Specific to Energy Transfer, its desired net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) is 4x to 4.5x and stood at 4.4x at the end of last year. It could decline into the high 3s this year before stabilizing in the mid-3s. In plain English, the company's debt ratio is heading in the right direction.

That's vital information for investors because not only does Energy Transfer's debt-reduction progress free up cash to grow the business or pursue deals, but it's also potentially supportive of better credit ratings and long-term payout growth.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.