Units of Energy Transfer (NYSE: ET) rallied 11.9% in January, according to data provided by S&P Global Market Intelligence. The master limited partnership (MLP) picked up where it left off last year when it surged 44%. A notable catalyst was that the energy company increased its distribution once again last month.
Energy Transfer declared its latest cash distribution to investors on Jan. 25. The MLP is paying $0.305 per unit, or $1.22 per unit annualized, which is 15% higher than the previous quarter’s payment level. That pushed the company’s distribution yield over 9%, even with last month’s rally.
With that increase, Energy Transfer has boosted its payout by about 75% over the past year. It has now achieved its goal of returning its distribution to a pre-pandemic level:
Energy Transfer slashed its payout by 50% in 2020 to retain additional cash during the pandemic to pay down debt. It has now achieved its target leverage range of 4.0 to 4.5 times debt-to-EBTIDA.
Even with that much higher distribution level, Energy Transfer is producing more than enough cash to cover its payout and capital projects. The company generated $1.6 billion of cash in the third quarter — up 20% from the prior year — enough to cover its payout with $760 million to spare. With capital spending running about $500 million a quarter, Energy Transfer is producing excess cash to strengthen its balance sheet. The company expects the bulk of its current slate of expansion projects to start producing cash by the end of this year, which should help further grow its cash flow.
Energy Transfer expects to report its fourth-quarter and full-year financial results in mid-February. It will also deliver its outlook for this year. That report could give the MLP more fuel to continue rising if it posts strong numbers and has a positive outlook.
One factor to watch is its capital spending outlook. Energy Transfer is close to approving a major LNG export project, which could be a significant long-term growth driver. The company hopes to sign enough sales contracts to support the project and bring in a financial partner to help fund construction. If Energy Transfer can secure those agreements, it would enhance the clarity of its long-term growth prospects. Projects like that could enable Energy Transfer to continue growing its distribution.
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Matthew DiLallo has positions in Energy Transfer and has the following options: short February 2023 $11 puts on Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.