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Energy Transfer LP(ET-N)

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Energy Transfer Has an Attractive and Growing 7.86% Dividend Yield

Barchart - Mon Jun 27, 1:02PM CDT
Energy - Natural Gas Burner with Flame On

Energy Transfer, LP (ET) is a gas pipeline and storage and NGL processing company based in Dallas. Right now the company pays a 20 cents quarterly dividend (80 cents annually) that gives ET stock an annual yield of 7.86% at today's price of $10.18.

But the company has made it clear that it wants to restore its prior 30.5 cents quarterly dividend as soon as it can. For example, here is what it said in its May 4 quarterly letter:

“Future increases to the distribution level will continue to be evaluated quarterly with the ultimate goal of returning distributions to the previous level of $0.305 per common unit per quarter ($1.22 annualized) while balancing the Partnership’s leverage target, growth opportunities and unit buybacks.”

Energy Transfer pipeline facility

What ET Stock Is Worth

So, assuming it eventually restores the dividend to 30.5 cents or $1.22 annually, ET stock would sport a 12.0% dividend yield. More likely the stock would rise to its 5-year average of 9.86%, according to Morningstar. That would push the stock price to $12.37. You can see this by dividing the $1.22 dividend by 9.86%.

This implies that ET stock could rise at least 21.6%. Moreover, if the dividend rises to $1.22 and the yield reaches 8% like today. That implies the price would rise 50% to $15.25 per share. So, from a practical standpoint, the average price target is about $13.81, or 35.7% over today.

Buying ET Call Options

Assuming the stock rises close to $13.81 over the next several quarters, it might make sense to buy the Jan 20, 2023 call options. The Barchart table below shows that the $11.00 strike price calls trade for 80 cents at the mid-point.

ET - Jan. 20, 2023 Calls - Barchart - as of June 27, 2022

That implies that the all-in cost, assuming the calls are held to expiration will be about $11.80 (i.e., $11.00 plus 80 cents for the calls). By then the stock could be at $13.81, or $2.01 over the all-in cost, representing a potential upside of 17%, if the calls are exercised.

But if the calls are simply traded, the return would be higher. For example, the in-the-money price of the calls would be $2.81 (i..e., $13.81 - $11.00 strike price). That represents a gain of 251% (i.e., $2.81/$0.80 - 1).

This looks like a good potential way to play this high-yield stock, especially if ET management keeps raising the quarterly dividend, as they clearly are trying to do.

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Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.