2023-12-30 01:39:04 ET
Summary
- The Williams Companies is a well-run midstream company with a well-supported 5.1% dividend yield and a growing dividend.
- The acquisition of MountainWest Pipelines Holding Company has positively impacted the company's financials.
- The midstream firm saw its FY 2023 YTD EBITDA grow 9% year over year, in part due to past acquisitions of natural gas assets.
- I expect The Williams Companies to raise its dividend by ~5% in FY 2024, resulting in a forward dividend yield of about 5.4%.
The Williams Companies ( WMB ) is a well-run midstream company that presents shareholders with the opportunity to earn a well-supported and stable 5.1% yield. The Williams Companies runs a diversified pipeline business and generates a ton of cash flow that supports a growing dividend. The Williams Companies’ acquisition of MountainWest Pipelines Holding Company, which closed in the first-quarter of FY 2023, has started to make positive adjusted EBITDA contributions. I also expect The Williams Companies to raise its dividend by ~5% in FY 2024 which would raise the forward dividend yield to about 5.4%!
Previous Coverage
I last worked on The Williams Companies in January which is when I recommended to buy the midstream firm in the context of the acquisition of MountainWest Pipelines Holding Company: The Williams Companies: Buy This Strong 5.4% Midstream Yield . The midstream company acquired MountainWest's natural gas transmission and storage assets at the time which complemented its strategic asset footprint. Since the midstream company continues to grow its adjusted EBITDA/distributable cash flow and has very good dividend coverage, I see WMB as a top dividend growth play for 2024.
High-single digit adjusted EBITDA growth
The Williams Companies is growing quickly, chiefly through acquisitions. The midstream firm announced the acquisition of MountainWest Pipelines Holding Company's 2,000-mile interstate natural gas pipeline system in Utah, Wyoming and Colorado for $1.5B (enterprise value) in December of 2022. The acquisition has already made a positive impact on WMB's financial results in FY 2023 and added incrementally to the company's adjusted EBITDA.
In the first nine months of the year, The Williams Companies generated $5.1B in adjusted EBITDA, showing 9% year over year growth, with growth chiefly driven by the firm’s natural gas assets.
The Williams Companies is a natural gas-focused midstream firm with considerable pipeline assets located throughout the U.S. The midstream firm plays a crucial role in connecting natural gas exploration areas in the Haynesville, Permian and Eagle Ford basins (to name a few) to consumer end-markets. The midstream company is growing chiefly with the help of acquisitions and just announced that it would purchase a portfolio of natural gas storage assets on the Gulf Coast for $1.95B ( Source ).
By far the biggest segment is Transmission & Gulf of Mexico which was responsible for approximately 46% of the company's third-quarter EBITDA. Northeast Gathering and Processing, which connects customers to the Marcellus basin, is the second-largest business driver for The Williams Companies. Both segments therefore saw the largest year over year increases in adjusted EBITDA in both Q3'23 as well as YTD.
The Williams Companies is a dividend growth play
The Williams Companies in the third-quarter guided for $6.6-6.8B in adjusted EBITDA compared against a prior outlook for $6.4-6.8B, meaning the low-end of the guidance was raised by $200M.
The midstream firm also projects considerable dividend coverage, based off of adjusted funds from operations, in FY 2023: WMB sees a dividend coverage ratio of 2.34X compared to 2.25X before. The raise is due to the company benefiting from incremental EBITDA growth related to the acquisition of natural gas assets earlier this year. With a 2.3X dividend coverage ratio, WMB's 5% dividend yield is about as safe as it gets and, importantly, investors should be looking forward to receiving a nice raise next year as well.
The Williams Companies is a play chiefly on a growing dividend over time. In FY 2023, the midstream firm raised its dividend by 5% to $0.4475 per-share quarterly. I expect a similar-sized dividend raise for FY 2024 and therefore estimate that the forward dividend yield for WMB will rise to 5.4%.
WMB’s valuation
I value midstream firms chiefly based on the enterprise-value-to-EBITDA ratio because the valuation metric accounts for the presence of large amounts of debt (typical in the capital-intensive midstream business) and non-cash depreciation expenses. The Williams Companies currently has an EV/EBITDA ratio of 10.2X which is slightly above the 1-year average EV/EBITDA ratio of 9.7X.
The valuation is also slightly above (but not by a lot) the EBITDA multipliers of other midstream firms like Enterprise Products Partners ( EPD ) and Kinder Morgan ( KMI ) which trade at about 9.3-9.4X forward EBITDA. WMB's strong distribution growth history, EBITDA predictability and aggressive position with regards to acquisitions are likely the reasons for a slighter higher than average valuation. Besides The Williams Companies, I also like Enterprise Products Partners because the midstream firm is a distribution champ and units are a strong buy for me: I Am Buying This 8% Midstream Yield Hand Over Fist .
Risks with The Williams Companies
The biggest risk for The Williams Companies is regulation that stifles the growth and development of the natural gas industry. New regulations limiting the pipeline industry’s expansion potential would negatively impact The Williams Companies’ potential to grow its cash flows and adjusted EBITDA. In the final analysis, this could mean that the midstream firm won’t be able to sustain its attractive, mid-single digit annual dividend growth rate.
Final thoughts
The Williams Companies is a well-run midstream firm and the company’s acquisition of MountainWest Pipelines Holding Company earlier this year already made a positive impact on its financials. The Williams Companies is seeing high-single digit adjusted EBITDA growth and expects a dividend coverage ratio of 2.35X for FY 2023 which suggests also that the midstream firm is going to give shareholders a decent raise next year. Since The Williams Companies has managed to grow its dividend consistently in the past, I continue to see WMB as an attractive dividend growth play for FY 2024!
For further details see:
The Williams Companies: A Strong 5% Midstream Yield For 2024