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What Does Targa Resources’ Current Valuation Indicate?

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Jun. 27 2016, Updated 8:04 a.m. ET

Targa Resources’ forward dividend yield

Targa Resources (TRGP) is currently trading at a forward dividend yield of ~9%. This is higher than its five-year average dividend yield of 6.5%.

Before the surge in Targa Resources’ stock price in February 2016, the company was trading at a yield of over 20%. The rise in TRGP’s stock price since then contributed to the fall in its yield. TRGP has risen by nearly 47% so far in 2016. The forward dividend yield of a company is calculated by dividing its estimated one-year future dividend per unit by its market price per unit.

The above graph compares Targa Resources’ historical dividend yields to its five-year average.

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TRGP’s EV/EBITDA multiple

Targa Resources’ forward EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 11.5x is higher than its historical average of 10.6x. This indicates that Targa Resources might be trading at a slight premium compared to its average historical valuation.

It must be noted that Targa Resources folded in its MLP in February 2016. This may impact its valuation, as it will no longer be getting IDR (incentive distribution rights) payments that it was entitled to as the GP (general partner).

The enterprise value of a company is roughly the market value of its debt and equity less its cash holdings. The EV/EBITDA ratio is neutral to capital structure, as it takes into account a company’s debt and equity. A lower ratio may indicate a possible undervaluation. Targa Resources’ trailing-12-month EV/EBITDA multiple is 11.3x.

ONEOK (OKE) and Enterprise Products Partners (EPD) are trading at much lower forward yields compared to TRGP. In the next part, we’ll compare Targa Resources’ forward yield and EV/EBITDA multiple with those of its peers.

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