Key Points
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It’s challenging to find bargains in the energy sector given its strong price gains this year.
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Energy Transfer has benefited from higher volumes.
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Enterprise Product Partners has been investing in growth projects.
- 10 stocks we like better than Energy Transfer ›
The energy sector, sensitive to crude oil and natural gas prices, has done well for investors this year due to increased commodity prices.
In particular, with oil prices skyrocketing following the launch of the Iran war earlier this year, the S&P 500 Energy sector gained 40% this year, through June 8. Energy stocks’ stock appreciation easily outpaced the S&P 500 ex-Energy‘s 22.9% increase.
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The rapid price gains make it challenging to find stocks in the sector trading at reasonable valuations. However, I’ve found two pipeline and transportation companies fit the bill.
Better still, they have high dividend yields and a history of raising payouts. That makes them attractive stock investments for their total return potential over an extended period.
1. Energy Transfer
Energy Transfer (NYSE: ET) transports oil and gas, including via pipelines, and stores energy, among other activities. That’s a steadier business than exploration and production energy companies, whose results depend on commodity prices. Rather, Energy Transfer, while not immune to energy prices, relies more on transport volumes of natural gas and crude oil.
The company saw higher volume across businesses in the first quarter, and revenue grew 31.1% year over year to $27.8 billion. Its quarterly adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), a key metric used by management, increased 20.5% to $4.9 billion. That’s also a proxy for cash flow.
Energy Transfer uses this cash flow to reward shareholders with ever-higher dividends. After slashing the payout in half in 2020, at the start of the pandemic, the board of directors has raised dividends quarterly for the last several years. That includes the first-quarter increase from $0.335 a share to $0.3375 a share.
At the new rate, Energy Transfer’s shares have an attractive 7.2% dividend yield. That dwarfs the S&P 500 index’s 1.1%.
Energy Transfer’s shares have gained 13.8% this year, through June 11. That sounds good, but it trailed the overall energy sector. Still, investors can rely on a steadier business versus the highly volatile energy and production companies.
Although the stock’s price-to-earnings (P/E) ratio has increased from 14 to 16 during this time, it’s lower than the S&P 500 Energy’s P/E multiple of 21.
2. Enterprise Products Partners
Enterprise Products Partners (NYSE: EPD) is also a midstream energy company. Its operations include transporting energy through its pipelines, as well as processing and storing the commodities.
Revenue fell 6.7% year over year to $14.4 billion, primarily due to lower marketing revenue. Its top line suffered from lower prices and volumes, which are cyclical rather than an indication of fundamental weakness in Enterprise Products Partners’ underlying business. Importantly, the company’s adjusted EBITDA grew 10% despite the revenue decline.
Management has also been investing in projects like adding processing capacity in the Permian Basin and pipeline expansion, which should increase revenue and profitability over time.
While making these investments, investors can also feel confident about dividends. Over the last year, the company paid out 57% of its adjusted cash flow from operations as dividends and share repurchases.
The company has raised dividends annually for a number of years. Most recently, the board increased the quarterly payout earlier this year, from $0.545 per share to $0.55 per share.
At the $2.20 annual rate, the stock has an appealing 5.9% dividend yield, more than quintuple the S&P 500’s yield.
Energy Product Partners’ stock price has gained 15.7% this year. That also lagged the S&P 500 Energy sector, although many companies in that index have results with greater sensitivity to oil prices.
The shares’ P/E ratio increased modestly from 12 to 14 during this time. However, that compares favorably to the S&P 500 Energy’s P/E multiple.
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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
