Despite Appearances, Energy Transfer Stock Has Gas Left in the Tank

There’s no way to present a picture-perfect scenario for Energy Transfer (NYSE:ET) investors. The commodities market hasn’t been pretty in 2020, and people with long-term positions in ET stock haven’t recouped all of their losses yet.

Despite Appearances, ET Stock Has Gas Left in the Tank

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Today’s message for loyal believers in Energy Transfer is that there is hope on the horizon. It’s difficult to predict where the prices of oil and natural gas will be in the coming months. So, it will require a measure of faith to hold on to your ET shares.

And as for prospective investors, you have a chance now to pick up some shares at a very fair valuation. Plus, you can collect dividend payments while you’re waiting for the stock price to (hopefully) rebound to pre-Covid levels.

A Closer Look at ET Stock

Saying that the ET stock price was cut in half isn’t even an accurate description of what happened this year. The fact is that the stock was doing just fine at the $13 level before the novel coronavirus wreaked havoc on the global economy and destroyed demand in the energy sector.

Sure, it would have been nice to grab ET shares in the $4.50 region. That marked the bottoming process, but traders can only know that in hindsight. So, now prospective investors have to determine whether the current share price is a reasonable entry point.

As for the current ET shareholders, we can at least say that the worst of the selling pressure seems to be in the past. Granted, there have been dips on the way back up, but even those dips could be viewed as opportunities to buy a few more shares. It’s all about perspective, you see.

Energy Delivered Across America

If you can believe it, around 30% of America’s oil and natural gas is moved via Energy Transfer’s pipelines. We’re talking about 90,000 miles of energy infrastructure spanning 38 U.S. states.

A compelling argument could be made that even though most people have never even heard of this company, Energy Transfer is a vital part of American infrastructure. So, for investors worried about the long-term viability of this company, you can probably rest assured that Energy Transfer is (to quote a term from the financial crisis) too big to fail.

As far as dividends are concerned, this company offers a yield that’s generous even by energy-sector standards.

Keep in mind that some companies cut their dividends sharply or eliminated them altogether. Meanwhile, ET stock offers an absolutely outstanding forward annual dividend yield of 15.14%.

Plenty of Value Here

For both current and prospective investors, ET shares offer a tremendous value proposition. A trailing 12-month price-to-earnings ratio of 11.07 suggests that the shares are reasonably priced or even oversold.

One concern that some energy-sector traders have is that companies might lack sufficient cash flow. That’s an understandable concern as the oil-price drop earlier this year created a negative cash-flow situation for a number of energy firms.

Yet, this needn’t be a major concern for ET shareholders now. In the first quarter, Energy Transfer managed to generate $1.42 billion in cash. And, as CFO Tom Long points out, Energy Transfer’s “coverage ratio for the quarter was 1.72 times, which resulted in excess cash flow after distributions of $594 million.”

Dividend investors, therefore, can remain reasonably confident that Energy Transfer will be able to maintain its robust dividend yield going forward.

Looking down the road, Energy Transfer expects to be free-cash-flow positive next year even after capital expenditures and distributions have been factored into the equation.

The Bottom Line

It’s not every day that investors get a chance to take a reduced-price position in an energy-sector giant that’s practically woven into the fabric of America. ET stock presents a highly compelling value offering and a dividend that’s not only generous but reasonably safe.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

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