The practice of swapping one investment for another is fairly common for many investors, regardless of whether they are focused on income or growth. Even though I still believe that Exxon Mobil (NYSE:XOM) offers a desirable contrarian dividend investment opportunity, the compelling opportunity offered by Energy Transfer Partners (NYSE:ET) was impossible to ignore. Since I did not wish to increase my overall allocation to equities, taking advantage of this opportunity required selling a portion of my Exxon Mobil shares, and this article discusses the four primary reasons underpinning this decision.
Reason One – Similar Underlying Force Driving Returns
Although the exact operations of their businesses obviously vary, the same primary underlying force that drives their returns in the long-term remains essentially the same, being oil and gas prices. This means that barring a black swan event, if the tide rises and lifts Exxon Mobil, then it stands to reason that Energy Transfer Partners will also benefit. Likewise, if global economic conditions were to continue deteriorating and thus oil and gas prices never recover, then they will both ultimately suffer.
This situation means that there should be at least a moderate if not a strong positive correlation between their future returns in the medium to long term. When reviewing the correlation between their historical total returns, it can be seen that these normally have at least a moderate coefficient of 0.30 or higher, as the graph included below displays. Whilst their historical performance does not necessarily guarantee their future performance, since their businesses are not fundamentally changing this nonetheless still provides precedence to assume a moderate to strong positive correlation for the future.
Reason Two – The Income Whilst Awaiting A Recovery
Now that it has been established that the general direction of their returns will likely be very similar in the medium to long term, the next consideration is which one offers the best income whilst awaiting for operating conditions to recover. Thankfully this is a simple open and shut case with Energy Transfer Partners providing a distribution yield that is more than double the dividend yield of Exxon Mobil, as the graph included below displays.
Whilst there are significant concerns regarding both of their abilities to sustain their current distributions and dividends, Energy Transfer Partners would have to reduce its distribution by around two-thirds before the yield would be meaningfully below that of Exxon Mobil. Every investor is entitled to their own views; however, based upon the analysis included in my previous article, I believe that Energy Transfer Partners has the ability to sustain its current distributions. To restate this analysis briefly, its capital expenditure reductions should see the free cash flow sufficiently cover distribution payments in 2021, whilst it has also taken…
Read More: The 4 Reasons Why I Swapped Exxon Mobil For Energy Transfer Partners (NYSE:ET)