Oneok(NYSE: OKE) has done a magnificent job paying dividends over the years. The pipeline giant has delivered over a quarter-century of dividend stability and growth. While it hasn't increased its payout every single year, it has grown its dividend by a peer-leading rate of more than 150% over the last decade.
The pipeline stock is now adding even more fuel to grow its high-yielding dividend (recently around 4.5%). It's making two acquisitions to enhance its footprint, cash flow, and ability to return cash to investors. That will make it an even more attractive investment for those seeking a growing income stream.
Drilling down into the deals
Oneok has agreed to a series of deals with leading infrastructure investor Global Infrastructure Partners (GIP). It's buying GIP's 43% interest in fellow pipeline company EnLink Midstream(NYSE: ENLC) for $3 billion in cash. It's also paying $300 million in cash for 100% of the interests in the managing member. The deal values EnLink at $14.90 per share, a 12.8% premium to its closing price on Aug. 27, the day before the deal's announcement. In addition, Oneok is buying Medallion Midstream from GIP for $2.6 billion in cash.
The pipeline giant plans to close these transactions early in the fourth quarter. After closing the deal for GIP's interest in EnLink, Oneok plans to pursue the acquisition of EnLink's publicly traded shares in a tax-free transaction (i.e., a stock-based acquisition). EnLink currently has a $12.3 billion enterprise value.
The transformational transactions will create a fully integrated, large-scale platform in the Permian Basin. The deals will also expand and extend its footprint in the midcontinent, North Texas, and Louisiana regions. The acquisitions will also further diversify the company's business mix. Oneok will get 35% of its earnings from natural gas liquids, 29% from gathering and processing, 27% from crude oil and refined products, and 9% from gas pipelines.
EnLink also has a growing carbon dioxide transportation business that supports carbon capture and storage projects. The combined company expects to generate about $8 billion of annual EBITDA. That's up from about $6.2 billion this year and double its size before its merger with Magellan last year.
Highly accretive transactions
Oneok expects the initial $5.9 billion cash acquisitions will be immediately accretive to its earnings per share and free cash flow. It anticipates that the deals will boost its earnings per share by an average of more than 5% annually from 2025 through 2028 while increasing its free cash flow per share by over 15% during that period. It expects to capture $250 million to $450 million of combined synergies within three years of closing the deals. Meanwhile, there's the potential for that to more than double based on other synergy opportunities it has identified.
The highly accretive nature of the deals further supports Oneok's capital allocation strategy. The company continues to expect it will return 75% to 85% of its free cash flow after capital expenses to shareholders over the next several years. That supports its target of increasing its dividend by 3% to 4% annually and repurchasing $2 billion of its stock over the next four years.
The company plans to use the remaining excess free cash flow to strengthen its already strong balance sheet. Oneok expects to end this year with a 3.9 leverage ratio after closing its deals with GIP. It anticipates leverage to steadily trend down toward its long-term target of 3.5 during 2026 as it grows its earnings and repays debt.
Value-enhancing transactions
Oneok has developed a knack for making highly accretive acquisitions in recent years. It is following up last year's needle-moving Magellan Midstream merger with the purchases of Medallion Midstream and a meaningful stake in EnLink. Those deals will further enhance its scale, footprint, and free cash flow. That will give the midstream giant more fuel to continue growing its dividend in the coming years, further enhancing its total return potential. Those features make it a compelling stock to buy for income and upside.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends ONEOK. The Motley Fool has a disclosure policy.
