If you have been looking for high-yield stocks to buy, Energy Transfer(NYSE: ET), with its hefty 8.1% distribution yield, has probably popped up on your search screens already. This large North American midstream energy company helps move major quantities of oil and natural gas around the world. But if you are thinking of buying Energy Transfer, there are three important facts you should take into consideration.
1. Energy Transfer is a complex business
Energy Transfer's footprint spans the United States. It breaks its portfolio of assets down into five segments: natural gas liquids (NGL) and refined products (28% of adjusted earnings before interest, taxes, depreciation, and amortization [EBITDA]), natural gas interstate and intrastate transportation and storage (24%), crude oil (20%), midstream (17%), and what amounts to an "other" category (11%). On a positive note, that's a lot of diversification. But it is also a lot of complexity.
Image source: Getty Images.
Of note is the "other" segment, which includes Energy Transfer's investments in (and control of) a pair of smaller, more focused master limited partnerships (MLPs): Sunoco LP(NYSE: SUN) and USA Compression Partners(NYSE: USAC).
Energy Transfer has been playing the role of industry consolidator of late, buying smaller midstream operators at a rapid clip. It closed one deal in late 2021, another in late 2022, one in early 2023, and a fourth in late 2023.
While one can debate the positives and negatives of all of these things, at the end of the day, what it means is that the business has a huge number of moving parts. And based on its pace of acquisitions, there's no indication that Energy Transfer has any desire to reduce that complexity. As such, this is an investment that will require a lot of attention from investors.
2. What happened to Energy Transfer's distribution?
At its current share price, Energy Transfer's distribution yields a huge 8.1%. That's probably why most investors look at the MLP. But the chart below should worry anyone who's trying to build a portfolio with reliable income streams. The purple line represents Energy Transfer's distribution history and includes a steep drop during the pandemic period. That was a point when oil prices were plummeting and the energy industry broadly was in a troubled state as wide swathes of the global economy were temporarily shut down amid efforts to slow the spread of COVID-19.
ET Dividend Per Share (Quarterly) data by YCharts.
In fairness, cutting the distribution was probably the right call for Energy Transfer. But if you were an investor who was relying in a significant way on the distributions and dividends you were collecting to pay your bills, it would have been painful for you. Notice the orange line on the graphic above, which is the distribution history of Enterprise Products Partners(NYSE: EPD), another large, high-yield midstream MLP. Enterprise continued to increase its distributions through that same difficult period. As an income investor, which one of these large North American MLPs would you have preferred to own?
3. Energy Transfer has made unitholder unfriendly decisions before
There's another minor wrinkle when it comes to Energy Transfer, even though it happened a fairly long time ago now -- at least, by Wall Street standards. In 2015, Energy Transfer agreed to buy Williams Companies(NYSE: WMB). However, the energy industry hit a soft patch, and Energy Transfer got cold feet. It eventually managed to scuttle the deal because it would have likely resulted in either the company having to cut its distribution or hold a crushing amount of debt.
Getting out of the deal was, once again, probably the right call for Energy Transfer. The problem is that in the effort to extract itself from the transaction, the company issued convertible securities, a material amount of which went to its CEO at the time. It was a complex affair, but the convertible securities would likely have protected the CEO from the impact of a distribution cut if the deal had gone through. That should raise some eyebrows on the trust front for conservative investors.
Energy Transfer: Go in with your eyes wide open
Every investment you can make comes with risks, and every corporation has a history. The point here isn't necessarily to say you shouldn't buy Energy Transfer stock. But if you do, you should go in with a clear understanding of what you are buying. This is a complex entity, and that is unlikely to change. Its distribution may not be as secure as you would like, given management's willingness to cut it during the pandemic. And management has, in the past, made other decisions that seem particularly unfriendly to unitholders. That doesn't mean it will make such moves again, but if you are or soon will be relying on the income your portfolio throws off to help cover your daily living expenses, you shouldn't ignore this MLP's past.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
