This 4.9%-Yielding Dividend Stock Is Adding Fuel to Accelerate Growth

Matt DiLallo, The Motley Fool

Tue, May 14, 2024, 4:14 AM 4 min read

Oneok (NYSE: OKE) surprised many in the midstream sector last year when it agreed to buy Magellan Midstream Partners in a massive $18.8 billion deal. The transaction enhanced its diversification and growth profile. It expects the deal to deliver free-cash-flow per-share accretion of more than 20% annually through 2027, fueled partly by capturing at least $200 million of synergies each year.

The pipeline company recently made another deal designed to accelerate its ability to capture synergies from Magellan and drive future-earnings growth. That will put it in an even better position to increase its 4.9%-yielding dividend.

A perfect fit

Oneok has agreed to buy a natural gas liquids (NGL) pipeline system from Easton Energy. It will pay about $280 million for 450 miles of pipelines in strategic Gulf Coast market centers.

The company plans to connect the pipelines to its NGL infrastructure in Mont Belviue, TX, and its refined products and crude oil infrastructure in Houston. "This strategic acquisition provides the quickest pipeline connectivity to and within the critical supply and demand centers for our NGLs, refined products, and crude oil assets in the Gulf Coast," stated CEO Pierce Norton in a press release unveiling the acquisition. The pipelines are highly complementary to its existing assets in the region:

A map showing the strategic fit of Oneok's existing pipelines with its new acquisitions. — Image source: Oneok.

By connecting these pipelines to its existing assets, Oneok can accelerate commercial synergies from the Magellan deal and drive future-earnings growth. It will be able to reduce costs, offer customers more flexibility, and expand its cash flow.

Already off to a strong start

Oneok has made excellent progress since closing its Magellan acquisition last September. The combined business generated strong first-quarter results due to healthy market conditions and the impact of adding Magellan's oil and refined products operations. Those strong market conditions and increasing confidence in its synergy expectations drove the pipeline company to increase the mid-point of its full-year adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance by $75 million to nearly $6.2 billion.

At the time, CEO Pierce Norton noted, "The strength of our business, underscored by accelerating volumes and a positive synergy outlook, resulted in an increase to our 2024 financial guidance and provides significant momentum into 2025." The recent NGL pipeline deal, which should close in the middle of this year, will provide it with even more momentum in the coming quarters.

Balancing growth and returns

The incremental cash flow from those deals and the associated commercial synergies drive Oneok's view that it will be able to return a lot more cash to its investors in the coming years. It unveiled a target of returning 75% to 85% of its cash flow from operations after capital expenses to investors over the next four years. It aims to pay a growing dividend (targeting 3% to 4% annual growth) and has authorized a $2 billion share-repurchase program.

Oneok will use the 15% to 25% of the excess free cash flow it retains to strengthen its already solid balance sheet and pursue additional high-return growth opportunities. The company ended Q1 with a solid 3.8 times leverage ratio. That gave it the flexibility to purchase an additional 10% interest in the Saddlehorn Pipeline Company (boosting its stake to 40%) and agree to acquire NGL pipelines from Easton.

Meanwhile, it's also investing a meaningful amount of capital into expansion projects. Its 2024 capital expense-budget range is $1.8 billion to $2 billion, which includes funding its Elk Creek expansion, West Texas NGL expansion, and MB-6 fractionator. Those projects should all enter service by next year's Q1. They will supply incremental cash flow to support its capital return plans and target of getting its leverage ratio below 3.5 times by 2026.

A well-oiled, income-producing machine

Oneok expects its acquisition of Magellan to pay big dividends over the coming years as it captures commercial synergies. It recently accelerated its ability to achieve that goal by purchasing a highly strategic pipeline system. That should enhance its ability to grow its cash flow, further strengthening its balance sheet and giving it more money to return to investors (which includes increasing its dividend). These factors make Oneok a potentially enticing option for those seeking a rock-solid and steadily rising passive-income stream.

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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends ONEOK. The Motley Fool has a disclosure policy.

This 4.9%-Yielding Dividend Stock Is Adding Fuel to Accelerate Growth was originally published by The Motley Fool

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