On the back of announcing the potential for a major dividend hike in the third quarter, Williams (NYSE:WMB) soared nearly 19% back on June 16. The dividend hike was a surprise even for a company that loves to project future dividend hikes.
The dividend increase is based on the previously completed purchase of parts of Access Midstream Partners L.P. (NYSE:ACMP) that it didn't own and then a merger of that LP with Williams Partners L.P. (NYSE:WPZ). According to Williams, the deal brings the company more access to shale plays in the energy infrastructure super-cycle in the U.S., but the question is whether new investors will benefit after the huge surge in the stock.
The distribution increases are coming from two primary places: the purchase and control of additional shares of Access Midstream Partners and the merger of that partnership with Williams Partners. The moves appear to help Williams and Access Midstream Partners to the detriment of Williams Partners, which is 36% owned by public unitholders.
The proposal involves Williams hiking its dividend by 32% to $0.56 quarterly, or $2.24 on an annualized basis. The plan calls for another increase in 2015 to $2.46 and further annual dividend growth of around 15% a year through 2017. The catch is that with the huge stock gains on the announcement, the stock now trades with a dividend yield of slightly below 4% after the increase.
Williams forecast Access Midstream Partners seeing 2015 distributions at least 25% above their current 2015 distribution guidance. The catch though is that Williams Partners takes a hit to distributions in 2015 due to the dilution of merging the units of Access Midstream that currently have significantly lower earnings. This detail is somewhat buried in the release and possibly a concern to those investors.
Dividend Versus Previous Plan
If the plan goes through as projected by Williams, the company will see the dividend surge to $2.82 in 2016 versus the previous forecast of $2.54. The amount projects to a solid yield of 4.9% in the current low interest rate environment. Most importantly, a lot of the gains during that time period take place immediately with the dividend surging from the previous expectations of $1.79 to $2.24 followed by solid gains going forward of up to an impressive 15% annually.
The company forecasts that after Access Midstream Partners takes advantage of an immediate bump in distributions and Williams Partners takes a hit, the LP will see annual 10% to 12% growth in distributions. The real question is whether these LPs are actually in favor of this deal. Despite the bump, Access Midstream was projecting faster long-term growth and Williams Partners might not appreciate the hit for long-term gains of only 10%. Regardless, the deal is expected to finalize in 2014.
For investors, the large jump following the announced plans to purchase control of Access Midstream Partners and hike the dividend leaves Williams stock in the prior position with a 4% dividend yield. The stock had previously gained 15% in the couple of months prior to announcing the deal, so it isn't a huge bargain anymore. Some risk probably exists that the merger with Access and Williams Partners doesn't complete, reducing some of the efficiencies from a combination, but for investors happy with a dividend below 4% and solid growth lined up, the stock is a solid conservative pick.
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