Energy Transfer (ET 0.83%) pays a prodigious cash distribution to its investors. The master limited partnership’s (MLP) payout is currently around 7.3%. That’s several times higher than the S&P 500‘s dividend yield.
The midstream giant expects to continue increasing its monster payout in the future, targeting 3% to 5% annual growth. Given all the growth it has coming down the pipeline, it should have no trouble achieving that goal.
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The coming growth wave
Energy Transfer’s co-CEO, Tom Long, discussed the MLP’s growth outlook on its first-quarter conference call. He noted that the company expects to invest about $5 billion into organic growth capital projects this year. He then ran through the company’s expectations for these projects:
Our projects are expected to achieve mid-teen returns, with most of them also providing incremental downstream benefits. In addition, the majority of these projects are expected online in 2025 or 2026, including our Flexport NGL export expansion, several Permian processing plant expansions, and our Hugh Brinson pipeline project. As such, we continue to expect the majority of the earnings growth from these projects to significantly ramp up in 2026 and 2027.
The size of the company’s current expansion wave positions it to deliver meaningful earnings growth in 2026 and 2027, when most of its projects will enter commercial service. The company posted 5% earnings growth at the midpoint this year, and these projects should accelerate that already solid growth rate. They’ll also help fuel distribution growth for the next several years.
Another wave is in development
Energy Transfer’s current backlog of under-construction expansion projects will enter commercial service by the end of next year. However, that doesn’t mean its growth engine is running low. The company is already working toward securing the next phase of its growth.
Long noted on the call that it’s making progress in securing Phase 2 of the Hugh Brinson Pipeline. The company has sold out the capacity for Phase 1 and is already negotiating with potential customers for the next phase, with demand outstripping its available capacity.
He also highlighted that the company is “making substantial progress toward commercialization” of its long-delayed Lake Charles LNG project. He noted that the company brought MidOcean Energy on as a joint development partner last month. MidOcean will fund 30% of the construction costs in exchange for 30% of the LNG production. Energy Transfer also signed LNG sales contracts with a Japanese utility and a German energy company last month. Long stated, “Lake Charles LNG is in discussions for the remaining uncommitted LNG offtake volume and is targeting FID [final investment decision] by year-end.” Lake Charles LNG has the potential to be a significant future growth driver for the company. The MLP will earn additional income from its retained stake in the facility and incremental cash flow by shipping higher gas volumes through its existing pipeline system.
The co-CEO also noted that the company continues to see robust natural gas demand from power generation facilities. He commented that Energy Transfer is “in advanced discussions with several other facilities in close proximity to our footprint to supply, store, and transport natural gas from gas-fired power plants, data centers, and industrial and onshoring of manufacturing.” It has already secured one data center opportunity with CloudBurst. Long stated: “We would expect these types of projects to require very low capital and to generate revenue relatively quickly. There is a lot of competition around these projects, but our team has done an excellent job of identifying the most likely opportunities.”
Securing these and other organic capital projects would enhance and extend the company’s growth outlook. The cash flow boost from these investments would help support distribution growth for many more years to come.
Waves of growth
Energy Transfer is currently working on a major expansion wave that should see several growth projects enter commercial service by the end of next year. They’ll drive an earnings surge in 2026 and 2027, giving it ample fuel to continue increasing its high-yielding dividend. Meanwhile, it has many more projects in development, including the needle-moving Lake Charles LNG project, which will give it even more fuel to continue growing in the future. Energy Transfer is a great stock to buy for a growing passive income stream, as long as you don’t mind dealing with the Schedule K-1 Federal Tax Form the MLP sends its investors each year.
Matt DiLallo has positions in Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
