1 Magnificent High-Yield Pipeline Stock Down 20% to Buy and Hold Forever

If you're looking for a stock that can give you a combination of a high yield and strong price appreciation potential, look no further than Energy Transfer (NYSE: ET). Best of all, the stock is 20% of its recent high, making now a great time to buy.

The master limited partnership (MLP) operates one of the largest integrated pipeline and midstream systems in the country. The company handles a variety of fossil fuels, including crude oil, natural gas liquids (NGLs), and refined products (such as gasoline), but its biggest area of focus is natural gas.

The company is particularly well-positioned in Texas, including in the Permian Basin and the Gulf Coast. This gives it access to both cheap natural gas and storage and transportation hubs. It also makes it one of the midstream companies best positioned to take advantage of growing energy needs stemming from artificial intelligence (AI).

AI opportunities

Tech companies are not the only ones set to benefit from the expansion of AI infrastructure. Training AI models and running inference is very energy-intensive, so companies are looking to power new data centers with cheap energy sources. This is why many AI data centers are being built in Texas and the Southwest, as these areas are in close proximity to the Permian Basin. The Permian is the most prolific oil basin in the U.S., but its wells also produce natural gas that drillers are largely looking to dispose of. This makes the area one of the cheapest sources of natural gas in the country.

Energy Transfer has one of the largest natural gas gathering, processing, and takeaway pipeline systems in the region, positioning it to provide both data center operators and utilities with affordable natural gas from the Permian. This is creating attractive growth project opportunities.

Its most important project is the Hugh Brinson Pipeline, which will move natural gas from the Permian to markets in Texas. The company has said the pipeline will likely become its most valuable asset, which is saying a lot for a company the size of Energy Transfer. It's also building another large pipeline called the Desert Southwest pipeline that will transport natural gas into the Arizona and New Mexico markets, and it has multiple direct projects with data center builders and operators, including Oracle, Cloudburst, and Fermi.

Both this year and next, Energy Transfer will spend nearly $10 billion on growth capital expenditures (capex), with the company projecting to get mid-teen returns. That should help propel growth in the coming years, with these projects set to add about $1.5 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) once they ramp up.

Image source: Getty Images.

High yield and attractive valuation

As investors wait for Energy Transfer growth projects to come online to drive growth, they can collect the stock's robust quarterly distribution of $0.3325 per unit, which equates to a 7.9% forward yield. The distribution is well covered by Energy Transfer's distributable cash flow (operating cash flow minus maintenance capex), with its coverage ratio checking in at 1.7 times last quarter, and the company's balance sheet is in some of the best shape it's ever been in.

On top of that, about 90% of the company's EBITDA comes from fee-based sources, which means it's not exposed to changes in commodity prices or spreads. It has recently said that it has the largest percentage of take-or-pay contracts in its history. These contract provisions mean it gets paid whether or not customers use its pipelines or services, adding to increased cash-flow visibility and distribution stability. Energy Transfer has projected it will continue to raise its payout at a clip of 3% to 5% a year.

In addition to its robust yield and strong growth opportunities, the stock is also attractively valued. It currently carries a forward enterprise value (EV)-to-EBITDA multiple of just 7.6 times 2026 analyst estimates for $17.2 billion in adjusted EBITDA. That's well below the 13.7 times historical EV/EBITDA multiple that pipeline MLPs traded at between 2011 and 2016 despite the group and Energy Transfer having better balance sheets and stronger coverage ratios today.

With the stock 20% off its highs, now is a great time to buy the stock on sale with growth opportunities set to ramp up.

Geoffrey Seiler has positions in Energy Transfer. The Motley Fool has positions in and recommends Oracle. The Motley Fool has a disclosure policy.