1 Magnificent High-Yield Pipeline Stock Down 20% to Buy and Hold Forever

Energy Transfer (ET) is highlighted as an attractive long-term investment for income and growth, especially after a recent 20% stock decline pushed its yield to nearly 8%. The midstream operator, characterized by a stable business model with 90% fee-based and high take-or-pay contracts, has significantly improved its balance sheet, boasting over 2x distribution coverage and projecting 3-5% annual payout increases. ET is aggressively pursuing growth with $5 billion in capex this year for major natural gas pipeline projects like Hugh Brinson and Desert Southwest, alongside advancing its Lake Charles LNG export facility, all while trading at an attractive ~9x forward EV/EBITDA, below historical averages and peers.

Analysis

Energy Transfer (ET) presents a compelling investment proposition, particularly for income-focused investors, with its stock down ~20% from recent highs, pushing its distribution yield to nearly 8%. This robust payout is well-covered by distributable cash flow, exceeding 2 times last quarter, and management anticipates consistent 3-5% annual distribution growth.

The company's operational stability is underpinned by approximately 90% of its expected EBITDA from fee-based services, largely insulated from commodity price volatility, and its highest percentage of take-or-pay contracts. This revenue predictability is supported by a significantly strengthened balance sheet, a result of strategic deleveraging efforts since 2020.

ET is aggressively investing $5 billion in capital expenditures this year, primarily in natural gas projects like the Hugh Brinson and Desert Southwest pipelines, alongside advancing the Lake Charles LNG project to capitalize on global demand. Despite these strong growth prospects, ET trades at an attractive ~9 times forward EV/EBITDA, significantly below historical averages and peers, suggesting potential undervaluation.

Key Decisions for Investors

• Consider initiating or increasing exposure to ET for long-term income and growth, given its attractive ~8% yield, strong distribution coverage, and projected annual increases.
• Monitor the progress of major capital projects, particularly the Lake Charles LNG facility and new natural gas pipelines, as these are key drivers for future cash flow and sustained distribution growth.
• Evaluate ET's current valuation of ~9x forward EV/EBITDA against its historical trading multiples and peer group, recognizing the potential for multiple expansion as growth initiatives materialize and balance sheet strength persists.