Income investors often like the enticing high yields of an entity like Energy Transfer (ET).
Source: Seeking Alpha Website July 6, 2020.
The problem with this high yield (shown above) is that the market has long been signaling trouble ahead. Therefore investors need to investigate what is behind that market attitude to determine if they really are able to withstand what may happen in the future.
High yields do not come without some risk. Yet I have heard time and again expressions of disappointment as high yields were cut during the current time of uncertainty. Generally high yield companies are the first to be unable to withstand the current uncertainty. High yield investors need to ascertain the characteristics of high yield investments before they decide to invest. Once that is done, then the investor needs to decide if the higher risk investment is suitable for his needs with the idea that good markets do not last forever. Sooner or later investment storm clouds appear.
I had done an article (for example) suggesting that Enterprise Products Partners (EPD) would probably be a safer way to ride out the current storm than Energy Transfer (ET). Yet the most common reply that I heard or received was that over several weeks, at the time, Energy Transfer had outperformed Enterprise Products Partners, therefore there was no problem. That logic was backed up by the higher yield of Energy Transfer certainly meant that the investment would yield greater returns. Besides, who sells at a loss?
Yet a previous article noted that there was already some signs of weakness in USA Compression Partners (USAC), and Sunoco (SUN). Energy Transfer was far more leveraged even before the preferred was taken into account and therefore less likely to withstand an unfavorable event. Yet so many investors replied that the superior yield meant that Energy Transfer was the better investment despite the recent disappointment of the common units. Taking a loss back then would not have resulted in a better investment.
But the investment world often does not reveal all the challenges to an individual investor at one time. Therefore at least part of that yield had to be due to a market perceived higher risk. The higher debt ratios and preferred stock should have signaled in inability (in relative terms) to handle any future bad news even if the investor did not know what that bad news was.
Today came a spectacular ruling that the Dakota access pipeline needed to be shut down. The appeals are still likely to at least partially reverse this. But the risk of a ruling like this obviously was known to management ahead of time.
Management Doubles Down Then Backs Off
An initial management reaction was interpreted by the press as a refusal to shut the pipeline down. Management should have immediately maintained better control on any communications with anyone. Any reaction that mitigates respect for the law or a court decision marks this investment as only for…
Read More: Energy Transfer: Management Issues (NYSE:ET)