Is Ultra-High-Yield Energy Transfer a Buy Now?

Businesses change over time. Sometimes that change can turn a once-risky company into an attractive investment, but only if you can overlook the prior history. Here's why Energy Transfer (NYSE: ET) could be a buy now and why some investors may still prefer to own a lower-yielding peer like Enterprise Products Partners (NYSE: EPD).

Let's get the bad news out of the way first. Energy Transfer agreed to buy pipeline peer Williams (NYSE: WMB) in 2006. It got cold feet when the energy sector hit a weak patch and worked to scuttle the deal. That was probably the right move for the business, which would have likely needed to load up on debt to get the deal done and/or cut the dividend. However, as part of its effort to get out of the acquisition it had agreed to, the company issued convertible securities that appeared to protect insiders from a dividend cut if the deal had gone through.

Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »

The deal was called off, so the converts turned out to be a non-issue for dividend investors. However, it was a move that would justifiably leave investors with trust issues. Then, during the 2020 oil downturn that accompanied the coronavirus pandemic, the partnership cut its distribution in half. The goal was to strengthen the balance sheet and reposition the business.

This was, again, likely a good move for the business. However, the problem is that the recession during that period was probably a point when dividend investors were hoping for consistency, not dividend cuts. The distribution is growing again and is above its level prior to the cut. And, perhaps more importantly, the business is on a different trajectory today than it has been historically, with what appears to be a focus on slow and steady growth.

Energy Transfer wants to be a tortoise like Enterprise

At this point, Energy Transfer is looking to grow its distribution by 3% to 5% per year. That's the slow-and-steady pace that investors have come to expect from peer Enterprise Products Partners. The difference is that Enterprise doesn't have the same negative events in its past. In fact, Enterprise has increased its distribution annually for 28 years. Conservative investors will probably be better off with Enterprise.

There's just one niggle here. While Enterprise offers an attractive 5.6% yield, Energy Transfer's yield is an even higher 6.3%. To be fair, Enterprise is a simpler business, noting that Energy Transfer also controls two other publicly traded master limited partnerships. The higher yield isn't just about the history; it requires more time and effort to track Energy Transfer. And Energy Transfer does appear to be a riskier investment than Enterprise.