Energy Transfer's (NYSE: ET) business prints cash. The midstream giant's diversified portfolio of pipelines, processing plants, storage terminals, and export facilities acts as a toll booth for the country's energy superhighway. It is paid fees as oil, natural gas, and other energy commodities flow through its midstream network.
The master limited partnership (MLP) generated a whopping $8.4 billion in cash last year, $4.4 billion of which it distributed to investors. The company has been steadily increasing the amount of cash it sends to investors, enhancing its already lucrative 7.5%-yielding distribution. That large and growing income stream makes Energy Transfer a super investment for those seeking to collect passive income.
Dishing out more cash
Energy Transfer recently declared its latest quarterly distribution payment. It set the rate at $0.3275 per unit ($1.31 annualized). That's a slight pay bump from last quarter ($0.325 or $1.30 annualized). It also represents a pay raise of more than 3% from the year-ago payment level.
The MLP can easily afford that higher rate. It produced enough cash to cover its distribution by a super-comfy 1.9 times last year. Meanwhile, its distributable cash flow has increased by 10% over the past year, fueled by accretive acquisitions, organic expansion projects, and healthy market conditions. Its cash flow tends to be very stable because 90% comes from steady, fee-based sources.
Energy Transfer also has a rock-solid balance sheet. The MLP's leverage ratio is trending toward the low end of its 4.0-4.5 times target range. That gives it even more financial flexibility to invest in growing its operations while increasing its lucrative distribution.
Plenty of fuel to continue growing
Energy Transfer has invested heavily in expanding its already extensive energy midstream network. The company spent $3 billion on growth capital projects last year and another $3 billion-plus to buy WTG Midstream. Those investments will help grow the MLP's earnings by about 5% this year.
The pipeline company currently plans to invest an additional $5 billion in growth capital projects this year. Its current slate of capital projects, which includes a large natural gas pipeline and additions to export capacity, will enter service through the end of next year. They will significantly boost its earnings growth rate in the 2026-2027 timeframe.
Meanwhile, the company has many more expansion projects under development, including its large-scale Lake Charles liquefied natural gas (LNG) export terminal. Energy Transfer sees a lot of growth ahead, driven by three notable catalysts: volume growth in the Permian, increasing demand for natural gas power, and global LNG exports. These themes should provide the company with many more growth projects in the future. Securing additional expansions would give it even more fuel to grow its distribution going forward.
Finally, Energy Transfer has ample financial flexibility to continue making accretive acquisitions as opportunities arise. The company has been an active acquirer over the years. In addition to buying WTG Midstream last year, recent deals have included the acquisition of Crestwood Equity Partners (2023), Lotus Midstream (2023), Woodford Express (2022), and Enable Midstream (2021). Energy Transfer targets acquisitions that strategically expand its midstream system and are accretive to its earnings and cash flow while maintaining its solid financial metrics.
A great way to collect lots of income
Energy Transfer is an income-producing machine. The MLP generates a growing stream of stable cash flow, which allows it to pay a steadily rising cash distribution to investors. That makes it a great option for those seeking to collect passive income and who are comfortable investing in MLPs, which send investors a Schedule K-1 Federal Tax Form each year.
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Matt DiLallo has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
