Energy Transfer: Buy, Sell, or Hold?

Energy Transfer (NYSE: ET) is the kind of business that an income investor would be attracted to. Its midstream assets produce reliable, fee-driven cash flows that help support a large and growing distribution. The distribution yield is a lofty 6.8%. But there are some issues that you need to think about before buying. Here's a look at the buy, sell, or hold call on Energy Transfer.

Sell Energy Transfer

If you place a high value on trust, you probably won't want to own Energy Transfer at any price. There are two reasons for this. The first one is pretty simple; the board chose to cut the dividend by 50% during the coronavirus pandemic. Given the uncertainty at the time that was probably the right move for the master limited partnership (MLP), but it would have meant a massive reduction in income for an investor that was trying to live off of their dividends. And it happened right when income stability was most needed, during a recession and bear market. Peer Enterprise Products Partners (NYSE: EPD), by comparison, increased its distribution in 2020.

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That's not the only reason to have trust issues here. Back in 2016, Energy Transfer agreed to buy peer Williams Companies (NYSE: WMB). Energy Transfer got cold feet and eventually got the deal called off, claiming it would risk causing a dividend cut. Part of that process, however, involved issuing convertible securities, a large portion of which went to the CEO at the time (and now chairman of the board). It appears that the convertibles would have protected the CEO from the impact of a dividend had one occurred.

These two events suggest that unitholders are not the top priority at Energy Transfer. And that should be more than enough to keep a lot of investors from buying this North American pipeline player.

Buy Energy Transfer

That said, Energy Transfer has a big 6.8% yield. The average yield of an energy stock is around 3.1%. If you are looking for an energy investment, the boost in income you'd get here is material. And the master limited partnership's distribution has been growing again. In fact, the distribution is larger now than it was prior to the cut. Meanwhile, distributable cash flow in 2024 covered the distributions paid by 1.9x, so the risk of a financially driven distribution cut seems remote.

Then there's the business' performance, which has been strong. The company's systems transported record volumes in six different categories. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) hit a record. And Energy Transfer started a number of projects that will support future growth.

If you can look beyond past transgressions, Energy Transfer appears to be performing quite well today.

Hold Energy Transfer

The reason to stick around is basically the same as the reason to buy Energy Transfer. The partnership is performing well. And since the distribution is above where it was prior to the cut, why sell it now?

ET data by YCharts

That said, the strong unit price recovery since the cut has taken the shares above their pre-cut levels. If you have some trepidation after living through that distribution cut, taking some money off the table wouldn't be the worst call in the world.

Trust is the lynchpin with Energy Transfer

When you boil it down, the big issue with Energy Transfer is trust. The distribution cut and the ugly Williams transaction are the types of events that can leave investors with sleepless nights. If you don't want that, then you probably don't want to own Energy Transfer. However, if those types of risks don't bother you, then this midstream partnership is doing well today and setting itself up for future success. Just go in with your eyes open to the possibilities on the negative side of the ledger.

Should you invest $1,000 in Energy Transfer right now?

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.