Prediction: With an 8% Yield and Dividend Increases Ahead, Now Is the Time to Buy Energy Transfer

With a more than 8% yield and an increasing distribution, Energy Transfer (NYSE: ET) stock is a dividend darling. The company announced a 3% increase in its distribution last month, taking it to $1.31 per share on an annualized basis. It generally raises its payout a little each quarter.

Meanwhile, it has plans to continue increasing its distribution by about 3% to 5% a year moving forward. Its distribution is well covered by its distributable cash flow (DCF), which is operating cash flow minus maintenance capital expenditures (capex). In the first quarter, its DCF coverage ratio was a robust 2 times, meaning that it generated twice as much DCF as it paid out in distributions.

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With a much-improved balance sheet, Energy Transfer is well-positioned to continue to grow its distribution moving forward. However, it also has solid growth opportunities in front of it.

Image source: Getty Images.

Energy Transfer is entering growth mode

For midstream energy companies to grow, they need to invest in new projects that will generate solid returns. Right now, Energy Transfer continues to see a lot of attractive opportunities, with it looking to spend $5 billion on growth projects this year. That's a big step up from the $3 billion in growth capex it spent in 2024.

Most of these projects will come online in 2025 or 2026, including several Permian processing plant expansions and its Hugh Brinson Pipeline project, which will provide natural gas takeaway from the Permian Basin to help support growing power needs in Texas. It's looking for mid-teens returns on these projects, which will help power growth in 2026 and 2027 as these projects ramp up.

The company is also making progress on its Lake Charles, Louisiana, LNG facility and expects to make a final decision on whether to go through with the long-awaited project by year-end. Liquified natural gas (LNG) is a strong, growing market, with Shell recently projecting that LNG demand would rise by 60% by 2040. This is a large project that Energy Transfer has been trying to get off the ground for years. With a different government administration and partners, and potential customers in place, it is moving closer to finally proceeding.

Energy Transfer also continues to explore artificial intelligence (AI) data center opportunities. The prior quarter, it announced a deal with data center developer Cloudburst to provide its newest data center project in Texas with natural gas. It said it is in advanced discussions with several other facilities near its footprint to supply, store, and transport natural gas. This includes data centers, as well as gas-fired power plants and industrial and onshore manufacturing plants. It said these projects require very little capital and generate revenue relatively quickly.

The company said it expects to make some significant announcements around data centers in the next four to eight weeks. In addition to Texas, it pointed to Arizona as a potential area of data center growth that it could help serve. "We just couldn't be more excited about these opportunities we're chasing," Co-CEO Marshall McCrea said on the earnings call.

Turning to its Q1 results, Energy Transfer saw solid growth, with its adjusted EBITDA in the quarter increasing 6% year over year to $4.1 billion. Volumes were up across its systems, including a 10% year-over-year jump in crude volumes, a 4% jump in LNG volumes, and a 3% rise in interstate natural gas volumes.

Distributable cash flow (DCF) to partners edged 2% lower to $2.31 billion, down from $2.36 billion a year ago.

Looking ahead, Energy Transfer kept its full-year EBITDA guidance of $16.1 billion to $16.5 billion.

Time to buy Energy Transfer stock

Energy Transfer is a high-yield stock with a growing distribution that has solid, high-return growth opportunities in front of it. Its distribution is well covered by its DCF, and it's done a great job of deleveraging the past few years. Note that deleveraging is when a company makes its debt more manageable relative to its profitability, improving its financial health. On its earnings call, the company said its balance sheet was the strongest it's been in its history.

It's also worth noting that Energy Transfer's business model is well-positioned defensively right now. About 90% of the company's EBITDA this year is expected to come from fee-based operations, where it has no exposure to changing commodity costs or spreads. It also said that a "high percentage" of its contracts are take-or-pay, which means that it gets paid whether or not its customers use its pipelines or services.

Meanwhile, with projected mid-teen returns on its growth projects, the company should add around $750 million in adjusted EBITDA from its current capex spending in the coming years. That's solid growth from a steady company.

Trading at a forward enterprise value (EV)-to-EBITDA multiple of just 7.7 times, the stock is also cheap both on a relative basis to other midstream master limited partnerships (MLPs) and on a historical basis. In fact, the average midstream MLPs traded at a 13.7x EV/EBITDA multiple between 2011 and 2016.

Now looks like a great time to buy the stock while it's still trading at a bargain. With growth projects already in motion and the potential for more announcements tied to AI data centers in the coming months, there's a good chance investor enthusiasm will begin to pick up soon.

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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.