Energy Transfer(NYSE: ET) recently declared its latest distribution payment. The master limited partnership (MLP) will pay its investors $0.3225 per unit in November. That's a slight bump of $0.0025 per unit from last quarter's level and a 3.2% increase from the prior year's payment. It pushed the midstream giant's yield closer to 8%.
The MLP has now raised its payment every quarter since the end of 2021. That upward trend should continue in the future. It makes Energy Transfer a great option for those seeking a sizable and steadily rising income stream and are comfortable with investing in an MLP that sends its investors a Schedule K-1 Federal Tax Form each year.
A very sustainable payout
Higher-yielding investments are often higher risk. However, that's not the case with Energy Transfer. The MLP has a very low-risk business model. Roughly 90% of its earnings come from stable fee-based sources, like long-term contracts and government-regulated rate structures.
Meanwhile, the MLP has a very conservative payout ratio. It expects to generate about $8.5 billion of annual distributable cash flow. With its current distribution run rate at roughly $4.5 billion per year, the MLP produces around $4 billion in excess free cash flow. That's more than enough money to cover its growth capital spending plan of about $2.5 billion-$3 billion per year, with room to spare.
The company currently uses its remaining excess cash to strengthen its already solid balance sheet. Its leverage ratio is trending toward the lower end of its 4.0-to-4.5 target range. The MLP plans to prioritize using its remaining free cash to repurchase units once it reaches the lower end of that range.
Ample fuel to continue growing
Energy Transfer currently expects its growth capital spending to be a little higher than its annual target range this year, in the range of $3 billion to $3.2 billion. That's due to its ability to secure more high-return expansion projects than expected. It has several projects under construction, including another expansion of its Nederland terminal, additional gas processing plants, pipeline expansions, and some natural gas-fired electric generation plants. Its current slate of projects should enter commercial service through 2026. That provides it with lots of visibility into its future cash flow growth.
The MLP has many more projects under development. The most notable is its Lake Charles LNG project. Other proposed projects include its Blue Marlin oil export terminal, carbon capture and sequestration projects, and blue ammonia projects. Securing these and other projects would add more fuel to its earnings growth engine.
Meanwhile, the MLP has the financial flexibility to continue consolidating the midstream sector. It recently closed its roughly $3.1 billion acquisition of WTG Midstream. The highly strategic and accretive acquisition will add $0.04 per unit to its distributable cash flow next year, increasing to $0.07 per unit by 2027. That acquisition alone can support the MLP's distribution growth plan for several more years. It's targeting to deliver 3% to 5% annual increases, or around $0.01 per unit annually.
The acquisition is one of several the company has closed over the past few years, which expanded its operations and cash flow. Future accretive deals could provide the MLP with even more fuel to increase its distribution.
A lucrative and steadily rising payout
Despite its mammoth size, Energy Transfer's payout is on a very sustainable foundation. It's growing its cash flow, which is allowing the MLP to increase its distribution, invest in expanding its operations, and maintain a solid financial foundation. With more growth coming down the pipeline, the MLP should have no trouble continuing to increase its payout. That makes it a great option for those seeking an attractive and growing passive income stream.
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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.
