Investors must pay attention to the numbers that any company they own reports each quarter. They tell the story of how well the company is doing financially. Unexpected changes can significantly impact the company’s value and its ability to return value to investors by distributing cash or repurchasing shares.
While some metrics are important to all companies, specific numbers matter more for certain companies. In the case of Energy Transfer (ET 0.30%), investors should keep an eye on its capital spending. Here’s why that number matters most for the high-yielding master limited partnership (MLP).
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Energy Transfer is well-known for its lucrative cash distribution. At more than 7%, it’s several times higher than the S&P 500‘s (^GSPC -0.97%) dividend yield (less than 1.5%). That makes it very appealing to income-seeking investors.
The MLP generated nearly $8.4 billion of distributable cash flow last year. It paid almost $4.4 billion in distributions to investors. The MLP used its remaining excess cash to fund capital expenditures to grow its business ($3 billion) and strengthen its balance sheet.
In recent years, Energy Transfer has targeted to keep its growth capital spending within its excess free cash flow. That’s partly due to prior issues with outspending its excess free cash flow to fund organic expansion projects. This necessitated the company taking on a lot of debt, which increased its leverage ratio. Everything came to a head in 2020 when the MLP had to slash its distribution to retain additional cash to repay debt.
Given the company’s past problems with an elevated capital spending profile, it’s a number that investors should watch. The MLP plans to spend $5 billion this year on growth capital projects. It has approved several large expansions in recent months. Energy Transfer has more projects in development, including its Lake Charles LNG project. Approving these projects would add to its capital spending outlay.
Energy Transfer must thread the needle and balance growth spending with its investment capacity. If its annual capital spending gets too high, it could start putting pressure on the company’s finances.
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.
