In this Left Brain Thinking podcast episode, host Chuck Jaffe interviews Brian Dress, CFA, Director of Research at Left Brain Investment Research, to explain why Energy Transfer (ticker ET) qualifies as a "bond‑like equity" in a market where high‑yield bond opportunities are scarce. Dress outlines the firm’s criteria for bond‑like equities—high current yield (typically 6‑8%) combined with potential price appreciation. He describes Energy Transfer’s mid‑stream pipeline business, emphasizing its reliance on fixed‑price contracts (about 95% of revenue) that generate predictable cash flows independent of oil price volatility. The conversation highlights ET’s strong free‑cash‑flow performance in 2020, its recent dividend cut, and the forward dividend yield of roughly 7% at an $8.50 share price. Dress argues that while the yield may decline as the stock price rises, investors can still benefit from both the income stream and capital gains, making ET a lower‑risk, income‑focused alternative to traditional high‑yield bonds. The episode also touches on the target yield range for bond‑like equities, the importance of upside optionality, and how investors should view yield changes in the context of total return.
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Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. And today we're going to be talking about a stock that falls somewhere between those two places, what the experts at Left Brain refer to as a bond-like equity. And we're gonna have that discussion with Brian Dress, director of research at Left Brain. You can learn more about him, the firm, and its thoughts on the investments we discuss here at leftbrainir.com. And they're on Twitter @leftbrainir. Brian Dress, great to chat with you again.
Hey Chuck, it's always great to be here with the left brain thinkers.
So what bond-like equity is on your mind, or, or perhaps more specifically the left side of your brain today?
So we're looking at Energy Transfer and that's ticker ET. You know, just a quick, recap of what we're looking for with these bond-like equities. Chuck, we've been looking, of course, always for high-yield bond opportunities for income for clients, both in wealth management and our other affiliated businesses. But the interest rates being the way they are and kind of how the Fed has been operating, not so many opportunities in the bond space. So we've been looking for a bond replacement type of idea, and that's bond-like equities, and Energy Transfer fits right into that mold for us.
What specifically do you like about Energy Transfer right now?
So there's a couple of things. Like we say, we are looking for those income type opportunities and these master limited partnerships fall right into that. We like energy and we've been looking all through the energy market for the best way to play it. Obviously with how energy has recovered from 2020, we're looking for ways to play it that are a little bit on the lower side of the risk spectrum. A lot of these energy companies over the last 10 years have been very high risk. Especially these really capital-intensive ones. And we really like Energy Transfer because risk in the pipeline business, which is what Energy Transfer does— Energy Transfer does transport, storage, processing, marketing, a lot of the sort of in-between work that the ENPs don't want to do. That's what Energy Transfer does. They have fixed-price contracts with all these exploration companies. So there's a minimum amount of revenue they're going to get from each of those contracts. And so it makes the revenues a lot more predictable. Even if there's volatility in the price of oil.
And there has been some volatility in oil prices and commodity prices. So when you get that kind of volatility, does it impact the bond-like equity side? I mean, under most circumstances, you get to a phase in the commodity cycle where you've got short supply and long demand, you wind up seeing not only prices, say, at the pump or wherever you need oil going up, you see prices in the stock market going up because of course they're getting more for what they're moving. But is that what you expect to have happen here?
So yeah, like I said, you know, 95% of their contracts are fixed price. So it's a little bit more predictable than like, say, if we're looking at an Exxon or somebody like that, where you're more at the whims of the vicissitudes of how oil moves. And I guess the way that I would look at it is looking back at 2020, you know, of course 2020 was a very tough year for oil business at all levels. But Energy Transfer was able to beat both the revenue and EBITDA projections that it made. It actually had its best year of free cash flow over the last decade. So like I said, this is a little bit lower risk than a lot of other oil businesses, and the reason for that is the predictable cash flows. Looking at 2020, which is maybe one of the worst years into the history of the oil business, they were able to do pretty well on the free cash flow side. They did lower the dividend for the first time in a very long time. But you know, if you look at the projections of the company and the free cash flows, their plan is to raise that dividend going forward. So we feel pretty good from the cash flow standpoint and also the history of the dividend.
And we should point out the dividend yield with the stock trading at about $8.50, using round numbers here, the forward dividend yield is still above 7%. So that's why it's attractive. I would think as well that to some extent you might be getting a value here even though I know that's not where you're normally looking, but so many stocks, especially oil patch, midstream kinds of stocks like Energy Transfer, they wind up getting hurt when they cut their dividends. In this case, because you expect the dividend to come back, because the stock took a little bit of a hit when it wound up cutting, are you getting a bit of a value here?
Well, yeah, I mean, I think it's unlikely that the yield is going to stay at 7%. So say if the dividend stays where it's at and, you know, business stays stays the way it is and kind of on those trends that we've been monitoring over the last few months. The reality is, is people are looking for yield all through the financial world. Like I said, I don't think it's gonna stay at 7%. So that gives you some price appreciation possibilities. And of course that 7% yield, that income is what we're looking for with the bond-like equities. But again, with the way that we look at high yield bonds and how we're trying to replace them, we're looking for that price appreciation opportunity as well. So it's not only that. Play on the dividend. But also, you know, if oil business gets better and they can renegotiate contracts at a higher price, we absolutely expect this business to do well for free cash flow to increase even beyond what it is now. And that would give you some upside in the stock as well beyond the income.
Let's again reaffirm, when we're talking about a bond-like equity for you, what kind of yield does it have to have? Because normally you're looking for, for high yield or you're looking for high growth. This is not necessarily either of those things, although at 7%, it certainly is not a low-yielding stock. But what would be the sweet spot or the target zone for the kind of yield you want if you're going to have that bond-like equity?
When we usually look for high-yield bonds, we're definitely looking for yields north of 5, 6, or 7. This is kind of in that same area. So we're looking for— in bond-like equities, we're looking for yields that are in that 6, 7, 8% range. And then we want to have some upside and optionality as well. So we want to have a situation where we think there's some price appreciation potential as well. So we need both sides of the equation there.
You know, you talked about how you think that the yield on this stock will go down. This is a question that people don't always kind of get right. You know, you're looking at current yield, but if you invested $10,000 in something today and the stock price goes up and the yield comes down, well, If you're investing it today and you're getting 7% on your money, as long as they don't cut the actual dividend, if the stock price goes up, you're still getting your 7% on the 10 grand you put in there. Effectively, the current yield is less if you're buying it. How do you guys look at it that way? Do you try to say if the yield winds up coming down on the current price, okay, we wouldn't buy it anymore, but what we got in where we got this better yield, we'll hold that.
Yeah, it's kind of complicated mathematically when you think about it that way. But yeah, I mean, we do, because of course, like on your $10,000, you're still going to make your 7%, but if the yield goes down because the price goes up, you're actually going to make a lot more than 7% because you're going to make some money on that price appreciation as well. So that's what we say. We want to see two ways to win in these bond-like equities. We want to make sure, yes, that income is coming, but then that optionality, if the stock price goes up, the yields come down, we're going to make money on that side of it as well.
And again, the one we're looking at this week, ticker symbol ET, it is Energy Transfer. Brian Dress, thanks so much for joining me to talk about it.
Thanks, Chuck. It's been a pleasure as always.
Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. Our conversations are not personalized investment recommendations but are designed to engage your brain. Please do your diligence before making any financial transaction. I am your host, Chuck Jaffe, and you can learn more about my hour-long weekday podcast at moneylifeshow.com. Thanks to my guest, Brian Dress, Director of Research at Left Brain Investment Research. Learn more about the firm and the stocks and the bonds that they like and much more at leftbrainir.com, and follow them on Twitter where they're @leftbrainir. Left Brain Thinking is available every Wednesday. Please follow us on your favorite podcast app and Plan to put your left brain thinking cap on every week. Until next week, please stay safe, everybody.
