Energy Transfer (NYSE: ET) is one of the more popular energy stocks. A big reason is the big-time distribution of the master limited partnership (MLP), currently yielding over 8%. Further, the midstream giant plans to increase its already massive payout by 3% to 5% per year.
As attractive as Energy Transfer’s payout might be these days, it’s not the most compelling one in the energy patch. Rival MLP Western Midstream (NYSE: WES) offers an even higher-yielding payout (more than 9%). Further, its distribution has grown at a much faster rate this year. Because of that, those who like Energy Transfer’s income stream should take a closer look at Western Midstream’s payout.
A high-octane income stream
Western Midstream currently pays a quarterly distribution of $0.875 per unit ($3.50 annualized). That level is an eye-popping 52% higher than the prior quarter’s payment level following a monster distribution increase by the MLP. At its recent unit price of around $38 apiece, it offers a 9.2% distribution yield, which is even more attractive than Energy Transfer’s payout (recently yielding around 8.1%).
Several factors have helped fuel the massive rise in Western Midstream’s distribution. A big one is its capital recycling strategy. Western Midstream recently closed the sale of $794.8 million in non-core assets. Those sales helped pay down the debt from its $885 million Meritage Midstream acquisition, which closed at the end of last year. The highly accretive Meritage Midstream acquisition gave the MLP the fuel to immediately increase its distribution by $0.05 per unit to an annualized rate of $2.30 per unit.
Those non-core asset sales enabled the MLP to deleverage its balance sheet, increasing its financial flexibility. Its net leverage ratio declined to 3.3 times at the end of the first quarter. Leverage is on track to slide to or below its 3.0 times target by the end of this year. That’s a much lower leverage level than Energy Transfer’s target range of 4.0 to 4.5 times.
The fuel to continue growing
Western Midstream has also been investing heavily to expand its midstream business and support the production growth of its customers. It currently expects capital spending to be between $700 million and $850 million this year. It recently completed the start-up of its Mentone III plant. This project and others currently under construction will grow its cash flow.
Meanwhile, with a very low leverage ratio, Western Midstream has the financial flexibility to continue making accretive acquisitions as opportunities arise. Future deals should help grow its cash flow. They have certainly helped drive Energy Transfer’s growth in recent years. Its recent acquisition of WTG Midstream will add $0.04 to its cash flow per unit this year and $0.07 to its bottom line by 2027.
Western Midstream plans to use its growing free cash flow to support enhanced capital returns to its investors. That includes opportunistically repurchasing units and increasing its distribution in line with its business growth rate. With its earnings growing by 11% this year and free cash flow rising by nearly 20%, it could increase its payout faster than Energy Transfer (it’s targeting 3% to 5% annual distribution growth).
A potentially even more attractive income option
Energy Transfer offers a roughly 8%-yielding payout expected to grow at a low- to mid-single-digit annual rate. That makes it a very enticing option for income-seeking investors. However, as attractive as that might be, Western Midstream’s payout is even higher (and has been growing faster). Because of that, those who like Energy Transfer’s big-time distribution should check out Western Midstream. It could supply even more income in the future.
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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.
If You Like Energy Transfer, You Should Check Out This Ultra-High-Yield Dividend Stock was originally published by The Motley Fool
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