Energy Transfer Stock Offers a Solid Total Return Potential

Despite solid earnings growth this year, Energy Transfer (ET) stock has fallen close to its multiyear lows recently. The stock plunged last week after the FBI began a corruption investigation of its Mariner East project. To add to its troubles, J.P. Morgan cut ET’s target price from $24 to $21 on November 21. The stock has fallen approximately 15% so far this year. Interestingly, the recent weakness could be seen as an opportunity.

ET: Solid distribution yield 

Amid the stock’s fall, Energy Transfer’s distribution yield looks even more appealing. It currently offers a yield of approximately 11%, notably higher than that of the broader markets and the benchmark Treasury yields. The ALPS Alerian MLP ETF (AMLP) is trading at a distribution yield of 9%. Not only is Energy Transfer’s yield attractive, its distribution growth also stands out from its peers. It increased its distribution by 13.4% compounded annually in the last five years.

Wall Street analysts gave Energy Transfer stock a mean target price of $20.15, which indicates a potential upside of more than 77% for the next 12 months. It is currently trading at $11.36.

In our view, the solid estimated upside and an attractive distribution yield make Energy Transfer a strong investment proposition. Its large fee-based revenues enable stable earnings, which ultimately facilitate stable distributions.

Currently, analysts seem generally optimistic about ET. Of the 20 analysts tracking ET stock, eight recommended a “buy,” 10 recommended a “strong buy,” and two recommended a “hold.” None of these analysts rated the stock as a “sell” on November 21.

Many midstream stocks were weak recently due to softness in crude oil and gas prices. Geopolitical tensions and slowing global growth have pressured energy commodity prices this year. To learn more about how the midstream sector could play going forward, please read Midstream Stocks Approach 52-Week Lows: Time to Buy?

Energy Transfer stock: Institutional activity in Q3

Tortoise Capital Advisors added net 14.87 million shares of Energy Transfer stock during the third quarter. It held around 4% of its total outstanding shares on September 30. Among its notable sellers, Goldman Sachs sold net 13.45 million shares of ET and held 2.4% at the end of Q3 2019.

Energy Transfer reported adjusted EBITDA of $2.79 billion in the third quarter, an increase of approximately 8% YoY. Importantly, distributable cash flow to partners increased 10% YoY to $1.52 billion in Q3 2019.

Peer comparison

Kinder Morgan (KMI) offers an upside potential of 10% based on analysts’ median target price of $22.10. KMI closed at $20.06 on November 20. It offers a dividend yield of 5%, lower than its peers. Kinder Morgan stock has notably beat peer midstream stocks this year and is up more than 30% YTD. To learn about its institutional investors, read Kinder Morgan: What Top Institutional Investors Are Doing.

Williams Companies (WMB) stock has a mean target price of $28.18 against its current market price of $23.38. This indicates a potential upside of almost 26% for the next 12 months. WMB stock has been only marginally up this year, and it offers a dividend yield of about 7%.