One of the more popular master limited partnerships (MLPs) is Energy Transfer Partners (NYSE: ETP). The company has about 33,000 miles of natural gas pipeline.
The attractive feature of the pipeline business is that it’s not dependent on the price of oil or gas. Rather, its business relies on the volume of product being shipped through its pipelines.[ad#Google Adsense 336×280-IA]The more gas that gets transported, the more money Energy Transfer Partners makes and returns to shareholders.
The stock pays a 7.1% yield.
And it has an interesting track record.
It has paid a dividend for nearly 17 years – or 66 quarters.
Of those 66 quarters, it has raised the dividend in exactly half of them.
The dividend was cut once.
In May 2008, the MLP slashed its quarterly distribution from $1.125 to $0.869. The next quarter, that amount was inched higher, to $0.894, where it stayed for the next five years. Then, in October 2013, the company started lifting the dividend again.
Since then, the dividend has gone up every quarter. It now stands at $0.995 per quarter – or $3.98 annually.
Plenty of Cash Flow
When I examine a company to see whether the dividend is sustainable, I look at cash flow. Generally speaking, I want to see a company pay shareholders 75% or less of its free cash flow. However, MLPs are different. Because their goal is typically to pay out as much of their cash flow as possible to shareholders, the 75% payout ratio doesn’t apply.
As long as the company isn’t paying out more than 100% of its distributable cash flow (a measure of cash flow for MLPs), I’m usually fine with it.
Last year, Energy Transfer Partners generated $2.6 billion in distributable cash flow (DCF). It paid out less than $2.1 billion in distributions for a coverage ratio (the ratio of DCF to distributions) of 1.27. In other words, the company generated 27% more free cash flow than it paid to shareholders. That’s up from 1.03 – or 3% surplus – the previous year.
Analysts forecast DCF to be $4.55 per share this year and $4.65 in 2016.
If Energy Transfer Partners comes in anywhere close to the analysts’ projection, it should have no problem raising the dividend for the foreseeable future.
Because the company did cut the dividend during the financial crisis, it doesn’t have a perfect track record and I can’t give it a perfect rating.
Despite that blip in 2008, I’m not overly worried about Energy Transfer Partners’ ability to pay the dividend.
In fact, I expect the company to continue raising it.
Dividend Safety Rating: B
Source: Wealthy Retirement