OKE - ONEOK: Why This 6% Dividend Stock Makes It Into My Portfolio

2023-11-27 03:45:07 ET

Summary

• ONEOK is expected to see a 2% to 3% dividend increase in 2024, potentially yielding over 6%.
• Investing in ONEOK provides stability and diversification to a portfolio, reducing volatility.
• The recent acquisition of Magellan and integration efforts position ONEOK for promising growth prospects.

Investment Thesis

I argue that ONEOK ( OKE ) is likely to see a 2% to 3% dividend increase in 2024, meaning that there's the potential that this stock could be yielding slightly more than 6% in 2024.

And at the same time, I assert that there's a lot more to this stock than just its high yield. This stock provides sanity to one's portfolio. Here's why.

Why Include a Dividend Stock in the Portfolio?

The graphic above isn't immediately obvious so I'll clarify. I've chosen to compare ONEOK with NVIDIA ( NVDA ) and SentinelOne ( S ). One is a magnificent 7 stock and one is one of the most cutting-edge cybersecurity names. I wanted to add a fintech and some other "jazzy" stock to this graph too, but it made my point difficult to observe and discern.

My point here is that investing in ONEOK has been meaningfully less volatile despite returning practically the same return over the past 3 months. And by extension, in the portfolio, one should have a dividend name or two.

I'm not a dividend investor. And I fully expect that over long periods of time, Nvidia and SentinelOne to do better than ONEOK. But in investing, it's not about the really long-term as much as it's building positions in the portfolio that give you staying power in the market .

Here's the top lesson that I've learned in the past few years. You can have the best company, but if they are to a large extent equally sensitive to changes in interest rates, the portfolio will be a lot more correlated than one would have thought.

For example, a Development and Operations services (DevOps) company, cybersecurity company, or e-commerce marketplace shouldn't be exposed to the same sectors of the economy. And yet, over the period of one year or slightly longer, their performance can sometimes overlap.

And you don't want a portfolio that's built up of stocks with similar exposure to the macro environment.

Why Invest in ONEOK?

ONEOK is not a Dividend Aristocrat since it has not raised its dividend each, thereby not qualifying for this label. But it has paid a dividend for 25 years and it has over time increased.

Consequently, I believe this implies to a large extent that ONEOK is a reliable dividend payer that can be counted on to continue paying its dividend.

Recent Developments

ONEOK's recent acquisition of Magellan and subsequent integration efforts position the company for promising prospects.

The collaborative approach between legacy ONEOK and Magellan employees has already yielded additional opportunities, showcasing the potential synergy of the combined entities. The increased scale, scope, and diversified operations enable ONEOK to create exceptional value for stakeholders.

With a focus on maintaining reliable operations, exploring optimization opportunities, and tapping into the expertise of Magellan in marine operations, ONEOK is poised for growth.

The robust performance in natural gas liquids and processing volumes, coupled with a healthy industry landscape and a more diversified asset portfolio, strengthens ONEOK's competitive position.

ONEOK's outlook for 2024 is marked by significant opportunities. The company anticipates a strong finish in 2023, setting a solid foundation for the following year.

The focus on natural gas volumes is notable, especially considering the double-digit growth observed in natural gas liquids and natural gas processing volumes in Q3 2023.

The robust producer activity and the reaching of record natural gas production levels in North Dakota further underscore the positive trajectory.

OKE Stock Valuation -- ~6% Yield

The graphic below is a reminder that throughout the commodity cycle, OKE has successfully raised its EBITDA profile.

Objectively, this isn't a fair comparison since ONEOK has very little to do with WTI prices. After all, its revenues are derived from the transportation of natural gas volumes through its pipelines. There's some poetic license in the graphic.

But this doesn't detract from its overall message that over time OKE has become increasingly profitable and cash flow generative.

And crucially, including the Magellan acquisition, 2024 will see even more EBITDA growth, so there's the possibility that in 2024, ONEOK's EBITDA could reach more than $6 billion of EBITDA.

Now, we have to keep in mind that the Magellan acquisition will increase the total number of shares outstanding by approximately 8% so today's equivalent market cap would be approximately $42 billion.

That being said, the consolidated business will get about a 17% uplift in EBITDA, which is yet another reminder of how much of a steal the Magellan acquisition has been and why it's so controversial.

Now, to get to the heart of the matter, I believe that in 2024, OKE will probably raise its dividend by a further 2% to 3%. After all, yes there are going to be more shares outstanding, but there's also going to be an uplift in EBITDA.

I don't presume there to be substantially more of a dividend payout, since OKE's balance sheet will already be carrying around 4x net debt to EBITDA and OKE has made it abundantly clear that they seek to improve their balance sheet down to 3.5x net debt to EBITDA by 2026.

The Bottom Line

In conclusion, ONEOK emerges as a compelling investment option, particularly for income-oriented investors.

With a strong history of dividend payments spanning 25 years and a commitment to reliability, ONEOK is positioned as a consistent dividend payer. The anticipation of a 2% to 3% dividend increase in 2024 adds to the attractiveness, potentially yielding over 6%.

The company's ability to navigate market volatility and maintain profitability, coupled with its strategic acquisition of Magellan, further reinforces the positive outlook for dividend growth.

For those seeking a resilient dividend play with the potential for steady income and yield expansion, ONEOK stands out as a promising choice in a very volatile market.

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