Energy Transfer’s High Yield: Attractive Income Opportunity or Recycled Risk?

Key Points

• Energy Transfer prioritized insiders during the 2006 energy downturn.
• The master limited partnership cut its distribution in 2020 during the pandemic-related energy downturn.
• Today, Energy Transfer is targeting slow and steady distribution growth.

Businesses evolve over time, and sometimes that evolution transforms a once-troubled company into a compelling income opportunity — provided you can look past its history. Here’s why Energy Transfer (NYSE: ET) could warrant a second look, and why some investors may still favor a lower-yielding peer like Enterprise Products Partners (NYSE: EPD).

Energy Transfer’s Questionable History

Let’s address the concerns upfront. In 2006, Energy Transfer agreed to acquire pipeline peer Williams (NYSE: WMB). When the energy sector weakened, the company backed out of the deal — likely the right call for the business, which would have needed significant debt financing or a dividend reduction. However, as part of the exit, Energy Transfer issued convertible securities that appeared to shield insiders from a dividend cut had the acquisition proceeded.

Image source: Getty Images.

The deal was ultimately abandoned, so the convertible securities never materialized as a threat to dividend investors. Still, a move like that understandably erodes trust. Then, during the 2020 oil downturn triggered by the coronavirus pandemic, the partnership slashed its distribution by half to strengthen its balance sheet and reposition the business.

While that cut was likely sound from a business perspective, it came at a time when dividend investors valued consistency above all else. The distribution has since recovered and now sits above its pre-cut level. More importantly, the business appears to be on a different trajectory today, with a stated focus on measured, steady growth.

A Tortoise, Not a Hare

Energy Transfer now targets distribution growth of 3% to 5% annually — the same deliberate pace investors associate with Enterprise Products Partners. The key difference is that Enterprise carries no such historical baggage; it has raised its distribution every year for 28 consecutive years. Conservative investors will likely feel more comfortable with Enterprise.

That said, there’s a trade-off. While Enterprise yields an attractive 5.6%, Energy Transfer offers an even higher 6.3%. Enterprise is a simpler operation — Energy Transfer also controls two other publicly traded master limited partnerships. The higher yield demands more time and vigilance from investors, and Energy Transfer does appear riskier. However, for those willing to accept that risk, the 0.7 percentage-point yield advantage translates to roughly 12.5% more income. Combined with the company’s reduced leverage and repositioned business, that premium may be enough to appeal to more aggressive income-oriented investors.

The Bottom Line

Energy Transfer is a notably more attractive income investment today than it was in the past. But its history matters — it could leave more cautious investors hesitant to trust the company again. If that’s the case, Energy Transfer’s appealing yield may not be worth the unease. However, if you can accept the company’s past missteps and believe it has matured into a dependable, slow-and-steady income generator, it may be worth exploring. Just enter with open eyes and monitor the business closely.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

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