Big Dividends Aren’t a Good Enough Reason to Own Energy Transfer Stock

Sometimes income-focused investors will buy energy-sector limited partnership stocks because they want to collect generous dividend payments. With a forward annual dividend yield of 17.6%, Energy Transfer (NYSE:ET) stock would certainly fall into this category.

Big Dividends Aren't a Good Enough Reason to Own ET Stock

Source: Kodda / Shutterstock.com

Energy Transfer is a master limited partnership, or MLP, that owns oil and natural-gas assets. These assets include pipelines, storage facilities and processing plants. Some people would refer to it as a “midstream” energy company.

There may be a good reason to own ET stock. For instance, you might have a bullish outlook on the prices of oil and natural gas. Or, you might find strength in the company’s business model. But by themselves, the dividend payments shouldn’t compel you to take a position in the stock.

A Hard Stock to Own with Confidence

Energy-sector assets tend to follow the prices of their associated commodities, at least to a certain extent. Therefore, in the company’s favor is the likelihood that higher oil and natural-gas prices would boost the ET stock price.

However, we can’t just assume that the prices of those commodities will go up. Both oil and natural gas are volatile assets. Companies associated with those assets need to have strong financials in order to withstand the whipsaws in the underlying commodity prices.

The ET stock price reflects the company’s sensitivity not only to oil and natural gas prices, but also to the impact of the spread of the novel coronavirus. The shares were trading at the $13 level at the beginning of 2020. By the middle of March, they were struggling at the $7 level.

The 17.6% dividend, while impressive, doesn’t get collected immediately as it would be paid out over the course of a year. And it’s probably not providing much consolation to ET stockholders who saw their shares practically get cut in half.

Moreover, as InvstorPlace contributor and Sizemore Capital Principal Charles Sizemore points out, there are specific drawbacks to MLP-stock investing. “No one likes MLPs. The structure is confusing and cumbersome, they issue K1 forms that make taxes a beatdown, and limited partners generally don’t have the the same rights as proper corporate shareholders,” explains Sizemore.

Outlook Gets Slashed

Perhaps the most important consideration is Energy Transfer’s financial standing. And judging by the company’s performance during the first quarter, it’s hard to remain confident as a shareholder.

For instance, Energy Transfer’s quarterly GAAP earnings per share came to a very disappointing loss of 32 cents. Wall Street analysts were expecting not a loss, but a gain of 66 cents.

Also during the first quarter, Energy Transfer posted revenues of just $11.63 billion. That’s down 11.4% compared to the same quarter of the previous year. It’s also $2.77 billion less than what the analyst community was expecting.

On top of all that, Energy Transfer reported a net earnings loss of $855 million for the first quarter. Much of this net quarterly loss resulted from lower energy-sector commodity prices and the issues associated with Covid-19, no doubt.

But that’s the chance you’re taking if you invest in an MLP stock that’s heavily dependent on energy prices. The big dividend payments are supposed to provide a cushion, but that cushion might not be enough to withstand any further commodity-price shocks.

Moreover, Energy Transfer has slashed the company’s growth-capital outlook for 2020 to $3.6 billion. This represents a reduction of at least $400 million. Plus, the company may reduce that outlook by an additional $300 million to $400 million at some point this year.

The Takeaway on ET Stock

The reduced outlook is a bad sign for the company and for ET stock. Collecting big dividend payments is nice, but the financial position of the company itself is more important. And until the data improves, it’s very difficult to justify owning the shares.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, David Moadel did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/big-dividends-arent-good-enough-reason-own-et-stock/.

©2022 InvestorPlace Media, LLC