2023-05-12 07:17:39 ET
Summary
- The Williams Companies has paid a quarterly dividend for 33 years. However, the dividend is not particularly well supported and WMB has cut its dividend twice in the past.
- Although revenues have increased over time, earnings have been generally inconsistent.
- WMB 10YR total return falls short of that of SP500 and even its peers by a wide margin.
- WMB appears to be over-valued based on the estimated value on average peers' PE ratios.
Background
I suffer from my own unique version of FOMO (fear of missing out). As a value investor, I'm not overly concerned about missing out on gains on over-inflated growth stocks that seem likely to deflate just as fast. What I fear more than death and taxes, is owning a company that is unlikely to be among the most favorable investment in its subsector.
The only effective treatment for my affliction is vitamin D where D is short for data. Several times a week, I download the biggest and best data sets that I can assemble from Seeking Alpha, one of my brokerage accounts, US EIA, or the Federal Reserve etc. and reduce that data to some logical conclusion about a given sub-sector. Most recently, I evaluated midstream energy companies searching for the company most similar to dividend royalty in a review entitled Let's Talk About The Dividend Kings' Midstream Cousins .
In that review I identified eight midstream companies with a greater than a 5% forward yield and at least a five year history of growing distributions. I ranked those eight midstreams on a four factor matrix with the results summarized in the table and plot below.
Midstream Royalty
Midstream Royalty
The Williams Companies, Inc. ( WMB ) landed near the bottom but was best on one factor. WMB has paid a quarterly dividend for 33 consecutive years. Note, WMB is a C-Corp as opposed to an MLP such that it pays a dividend rather than a distribution like its MLP peers. Those investors who wish to explore the difference between a C-Corps and MLPs may find this discussion helpful.
I became interested on the 33 years of consecutive of quarterly dividends but remainder of this analysis include not only dividend history, but also total return, earnings history, and dividend safety.
Dividend History
WMB's 33 year history of quarterly dividends is detailed in the plot below.
WMB Quarterly Dividends
The bad news for investors is that WMB does not appear to be hesitant to cut its dividend when earnings fall. WMB is also unlikely to ever become dividend royalty based on this record. However, this may not be bad news for dividend investors. WMB's current forward yield is 6.14% with an average 4Yr yield of 6.4% compared to the average of dividend aristocrats at 2.4%. As an investor, I might be comfortable getting paid more most of the time at the expense of inconsistency. Lastly, WMB's minimum yield over the last 10 years is 3.3%.
Return History
Although some dividend investors and even analysts will argue all day that dividend yield is all important, I still feel like total return is the critical metric.
10Yr Total Return History
WMB 10Yr total return of 38.7% can perhaps best be described as mediocre. WMB total return lagged that of SP00 by over 100% and that of Global X MLP & Energy Infrastructure ETF ( MLPX ) by about 9%.
Dividend Safety and Growth Potential
Payout ratio is the most common way to measure dividend safety, but I also calculated a figure analogous to distribution coverage ratio for the sake of comparison to midstream peers. For this purpose, distribution coverage ratio (DCR) is defined as (operating cash flow - total CapEx)/dividend . Readers who are most interested can compare this figure to that of ( CEQP ), ( CQP ), and ( DKL ) in my recent analyses.
EPS, DCF, Dividends, Outstanding Shares
Each EPS column and DCF column is labeled with its corresponding payout ratio or analogous DCR. Over most of the last 5 years, payout ratio has been well over 100% while over the last 12 months it was just 81%. With regard to WMB's midstream peers organized as MLPs, 1.3 is generally considered a safe coverage ratio when total CapEx is subtracted from operating cash flow. In the three most recent years, DCR has been 1.3 or above.
Revenue and Earnings
Over the last ten years, revenue has generally increased while earnings have been inconsistent. Most recently, earnings have been positive and growing over 4 consecutive years.
What is WMB Worth?
WMB's seven peers identified in my previous review, Let's Talk About The Dividend Kings' Midstream Cousins , were selected for a share value estimate based on comparable peers' average PE ratio.
Estimated Share Value
Estimated 2023 EPS is $1.72 vs $2.12 over the last 12 months while average peers' PE ratio is 11.25 vs WMB's current ratio of $13.75. Given these two values, share value was estimated at $19.46 vs current share price of $29.00 suggesting over 30% downside.
Conclusions and Recommendations
I'll admit that I began this analysis wanting to fall in love with WMB based on its 33 year history of paying quarterly dividends. However, I make every effort to take a disciplined approach to each analysis. I will ultimately refer to my analyses to make decisions with relation to not only my own portfolio, but also my extended families' retirement, 529 education, and health savings accounts.
With relation to this high standard, WMB falls short in every area examined. Dividends were inconsistent over the long-term with 2 major cuts. WMB total return was disappointing falling short of SP500 and even an ETF of peers ( MLPX ) over the last ten years. Although dividends are currently well supported, earnings are inconsistent over time. Lastly, based on a share value estimate on average peers' PE, WMB appears over-valued with over 30% downside.
I sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes. - Charlie Munger
For further details see:
The Williams Companies Falls Short Despite A Long Dividend History