Analyzing Williams Companies’ Valuation since Last Week’s Gains

In the previous article, we looked at technical indicators for Williams Companies (WMB). In this article, we’ll perform a valuation analysis for WMB based on its historical and forward multiples.

Williams Companies’ EV-to-adjusted EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio using a trailing-12-month adjusted EBITDA is 12.6x. The current EV-to-adjusted-EBITDA is below the last-eight-quarter average of 14.8x.

Williams Companies is currently trading at a forward dividend yield of 4.2%. The ratio is higher compared to the historical five-year average of 4.0%. The forward dividend yield of a company is calculated by dividing its estimated one-year future dividend per share by its market price per share.

WMB is currently trading below its peer average EV-to-adjusted-EBITDA multiple of 13.6x. TransCanada (TRP) and Plains GP Holdings (PAGP) are trading at higher multiples than WMB. Moreover, WMB’s forward EV-to-EBITDA multiple of 12.3x is below the peer median of 13.5x. The forward EV-to-EBITDA multiple is based on the next-12-month EBITDA estimate.

WMB’s slight undervaluation relative to its own historical valuation and peers might indicate a buying opportunity considering its significant natural-gas-focused growth opportunities and presence in the prolific shale plays. However, the current valuation might also reflect WMB’s high leverage and the recent removal of IDRs (incentive distribution rights) from Williams Partners’ (WPZ) capital structure. However, the company is expected to benefit from a simplified organizational structure in the long run.