For income-focused investors, the landscape is shifting as interest rates are expected to decline in the coming years, prompting a deeper exploration for attractive investment opportunities that boast solid yields. Among the notable contenders is Energy Transfer (NYSE: ET), a prominent pipeline operator recognized for its expansive integrated midstream system across the United States. This company specializes in the transportation of hydrocarbons—ranging from natural gas and natural gas liquids to crude oil—and offers a diverse array of services, including storage, gathering, processing, and fractionation.
Here are three compelling reasons why Energy Transfer deserves a position in your investment portfolio.
Robust Yield with Growing Distributions
One of the main attractions of Energy Transfer is its impressive forward yield of 7.8%. Currently, the company issues a quarterly distribution of $0.32, with plans to increase this amount by 3% to 5% annually. It’s worth noting that as a master limited partnership (MLP), Energy Transfer distributes cash rather than paying traditional dividends—which allows for a tax-deferred return of capital until the units are sold. Investors should be prepared to handle a K-1 form for tax reporting.
Following a significant reduction in its distribution in 2020 aimed at strengthening its balance sheet, Energy Transfer has since rebounded, offering a distribution rate that now surpasses its pre-cuts. The financial health of the company is solid, with leverage levels comfortably targeted between 4.0x to 4.5x, reinforcing the reliability of its distribution, which is currently covered more than sufficiently, with a coverage ratio over 1.8 times as of the last quarter.
Promising Growth Prospects
Alongside its attractive yield, Energy Transfer is well-positioned for growth, boasting one of the largest backlogs in the midstream sector. For this year alone, the company is channeling approximately $3.1 billion into growth initiatives, with a goal of achieving a minimum 12% return on this investment. This strategy is projected to enhance earnings before interest, taxes, depreciation, and amortization (EBITDA) by over $370 million annually once these projects are operational.
Particularly intriguing is Energy Transfer’s strategic positioning to cater to the soaring energy demands driven by artificial intelligence (AI) data centers. These facilities are notorious for consuming vast amounts of energy, necessitating a dependable and economical power source. While some cloud service providers are exploring nuclear energy, many alternatives remain in developmental stages, making natural gas a pivotal resource. Energy Transfer has actively secured agreements with energy firms to fulfill this growing demand, showcasing its proactive approach in an evolving market.
Attractive Valuation
Despite its strategic assets, growth opportunities, and financial stability, Energy Transfer’s stock is trading at some of the lowest valuations seen in the MLP midstream sector. Valuations for midstream companies are often gauged using the EV/EBITDA multiple, which offers a comprehensive view by accounting for net debt. Energy Transfer currently boasts an EV/EBITDA multiple of 8.1x based on 2025 projections, significantly below its historical benchmarks and emblematic of the wider sector’s retrenchment, which has seen midstream firms valued at an average of 13.7x from 2011 to 2016.
Investors should keep in mind that the midstream environment is ripe for an upswing, provided that companies can successfully navigate the demands of the AI-powered energy landscape.
In conclusion, with a strong yield, healthy financial posture, ample growth prospects, and an appealing valuation, Energy Transfer is a worthy consideration for investors looking to bolster their portfolios amid a fluctuating rate environment. Be sure to evaluate your investment approach and consider how Energy Transfer aligns with your long-term financial goals.
Before making a decision, however, it’s prudent to conduct detailed research and explore other potential investment opportunities to better inform your strategy. The market is full of dynamic options, and Energy Transfer could be a significant player in a diversified portfolio-focused on future growth in energy demand.