2023-03-08 08:30:15 ET
Summary
- Williams Companies is a utility-like company with rate regulated gas pipelines and storage facilities.
- It's demonstrating record operating fundamentals and recent bolt-on acquisitions strengthen the company's future.
- With a strong balance sheet, high dividend coverage and yield, it appears that WMB stock offers excellent value at present.
I love a good sell-off, not because I like seeing unrealized losses in my portfolio, but rather because I like picking up quality names on the cheap.
Of course, with banks now offering higher interest than before on CDs and money market accounts, one may wonder why one should risk capital in equities.
Well, the question is how durable that yield on a savings account really is compared to investment in real assets over the long run?
That high yield can go away as quickly as it came when the Fed decides to one day cut rates. This probably won’t happen in the immediate future, but I believe that day will one day come.
This brings me to Williams Companies ( WMB ), which as shown below, is trading materially down from its peaks over the past 12 months, including the most recent one in early December. Let’s explore what makes WMB a great income stock to buy at current levels.
Why WMB?
The Williams Companies, Inc. is an energy midstream infrastructure company that owns and operates natural gas gathering, processing, and storage assets. It’s also a C-Corp, which means no schedule K-1 for investors.
WMB's asset base includes over 30K miles of pipelines system-wide, with major positions in top U.S. supply basins. This includes Transco, America's largest volume and fastest growing pipeline, handling 30% of the natural gas consumed in the U.S. that’s used for power generation, heating, and industrial customers.
WMB can be regarded as a utility-like company, as it gets more than half of its cash flow from rate-regulated gas pipelines. Plus, recent bolt-on acquisitions of Sequent and NorTex have bolstered WMB's pipeline and storage positioning along its Transco system and in the Dallas, Ft. Worth region.
Meanwhile, WMB is seeing strong demand for its services, including record 16.5 Bcf in gathering volume and 24.4 Bcf/d transmission volume in 2022, up 9% and 3% compared to the prior year. This supported 20% adjusted EBITDA growth in its fourth quarter, and the record performance in natural gas transmission and gathering volumes caused WMB raise guidance twice last year despite inflation and higher interest rates.
Moreover, its strategic acquisitions of NorTex Midstream and Trace Midstream's Haynesville assets enables its “wellhead-to-water” strategy of connecting producing regions to the Gulf Coast for export. Plus, WMB recently closed on its MountainWest acquisition this year, thereby enhancing its footprint in the western U.S. Management expects these developments to support significant growth for the foreseeable future.
Looking ahead, WMB has a number of growth projects, including the Regional Energy Access expansion projects, which is expected to provide the Northeast with greater access to clean and cost-effective natural gas, as well as advanced LNG capabilities in its wellhead-to-water strategy as global demand should remain strong due to supply disruptions coming out of Russia.
This is supported by WMB’s strong balance sheet, with a low net debt to EBITDA ratio of 3.55x, sitting well below the 4.5x level that ratings agencies generally consider to be safe for midstream companies, and WMB has a utility-like business model on top of that.
Plus, while WMB’s 5.9% dividend yield isn’t the highest in the midstream space, it has a higher dividend coverage ratio than most midstream peers, at 2.6x . Notably, the dividend also comes with a 7.2% 5-year CAGR and 5 years of consecutive growth. As shown below, WMB scores A and B grades for dividend safety, growth, yield, and consistency.
Lastly, WMB has become rather attractive at the current price of $30.37 with an EV/EBITDA of 12.4, which sits at the low end of its valuation range over the past 5 years. Analysts have a consensus Buy rating on the stock with an average price target of $37.10 , translating to a potential 28% total return over the next 12 months.
Investor Takeaway
Overall, WMB is a great income stock to buy for its low valuation, strong balance sheet and dividend safety. It has a utility-like business model, and is well positioned to benefit from its bolt-on acquisitions and strategic projects that connect producing regions to export facilities along the Gulf Coast.
With great operating fundamentals and a beaten down share price, it appears the market is irrationally pricing WMB at present, thereby giving an excellent opportunity to value and dividend growth investors.
For further details see:
Williams Companies: What More Could You Ask For