Energy Transfer (NYSE:ET) offers an impressive yield, to say the least. Right now, the stock is yielding 6.9%, a little more than five times what the S&P 500 index is paying on average.
This payment has shot upward rapidly in recent years. Energy Transfer’s trailing 3-year dividend growth rate is over 25% on an annualized basis.
With that said, investors likely shouldn’t count on this kind of extremely strong growth continuing into the next couple of years. The dividend payout ratio is currently over 95%, suggesting it may have limited room to raise its payout in the immediate future. The good news, however, is that there are several factors supporting potential further growth at Energy Transfer.
Why Energy Transfer Could Be in For Strong Growth Ahead
One of the major contributing factors to Energy Transfer’s growth over the next few years is higher prices and demand for natural gas.
In 2024, the company already saw its natural gas volume rise by 5% year-over-year. American exports of natural gas and rising demand are also expected to result in higher prices over the next year, potentially benefiting companies like Energy Transfer as producers increase the volume of natural gas moving to the market.
As demand for natural gas electric power generation associated with AI data centers spikes, expect ET to ride the tailwinds. They require massive amounts of electricity, and dedicated natural gas generation facilities are viewed widely as an ideal solution. In its full-year filing, management reported that it had entered into an agreement with CloudBurst to provide natural gas to the company’s data center campus in Texas.
A similar example of strong natural gas demand helping Energy Transfer is its new 20-year agreement to supply 2 million tons of liquefied natural gas annually to Chevron. With natural gas projects of this sort ramping up, it’s quite likely that natural gas will continue to play a larger and larger role in Energy Transfer’s overall business.
Yes, natural gas is growth driver but the company’s volume of oil transported rose 15%, and the Trump administration’s tariff and energy policies will likely increase demand for domestic oil compared to imports.
Cumulatively, these tailwinds could do a great deal to support Energy Transfer’s growth. In the upcoming five years, analysts are projecting continued EPS growth of about 14.7% per year from the company. With earnings rising at this rate, management would likely be able to both raise the dividend steadily and continue investing in the company’s ongoing growth initiatives.
Energy Transfer also has the option of repurchasing shares to drive higher per-share earnings if and when it can no longer drive growth through investment in new energy transport projects. The company hasn’t bought back any of its shares recently, but it still has about $880 million worth of repurchase authorization left over from 2023. Although the company is still finding better uses for its capital, this could help ET continue to grow its EPS even if macroeconomic conditions become less favorable to it.
Will ET Share Prices Rise?
Although Energy Transfer’s most appealing characteristic is likely its dividend, the stock could also deliver some fairly good returns over the coming 12 months. At 14.6x earnings and 0.8x sales, the stock is trading at fairly low multiples to its key financial metrics. This introduces at least a possibility that ET could currently be undervalued.
This view lines up fairly well with analyst price forecasts. The average target price for ET is $23.26 per share, a gain of about 24% from the most recent price of $18.73. Even if the stock considerably undershoots this projection, it is set to deliver market-beating returns when its high yield is taken into account.
Institutional investors also seem to be betting on ET’s long-term prospects. Over 60% of the company is currently owned by institutions. These long-term holders of ET will likely stand to benefit both from gradual appreciation and its dividend payouts.
Is Energy Transfer a Good Buy for Dividend Investors Now?
At the moment, Energy Transfer is a strong buy with a $23.20 per share consensus price target according to 17 analysts.
Not only does it offer a high dividend yield backed by strong cash flows, but it also has decent opportunities for more growth going forward. As demand for natural gas rises and domestic oil production ramps up, it’s quite likely that Energy Transfer and other pipeline operators will see steady demand for their services.
This ability to take advantage of new growth opportunities may also make ET more appealing than REITs, which tend to offer comparable yields. Although investors could find similar income opportunities elsewhere, ET’s combination of yield and growth potential is difficult to beat. As such, Energy Transfer has the hallmarks of being a good stock to buy today and hold for quite some time.
With another round of tariffs going on and concern growing about weaker growth this year, many stocks are slated to be in for a choppy 2025. With a high yield, ET has all the hallmarks to help investors ride out some of these difficulties. At the same time, the long-term contracts could give it a degree of predictable cash flow that few businesses can count on during economic downturns.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
