Williams Companies: There Are Better Pipeline Plays

Feb.14.12 | About: Williams Companies (WMB)

The Williams Companies, Inc. (NYSE:WMB) is an integrated natural-gas company focused on exploration and production, midstream gathering and processing, and interstate natural gas transportation, mainly in the United States. Most of the interstate pipelines are held through a 75% interest in Williams Partners L.P. Williams Partners owns and operates 10,000 miles of natural-gas pipeline. It also owns and operates 3,900 miles of mainline and lateral transmission pipelines.

A vast majority of the historical data (key ratios) was provided by Zacks.com; after trying many sources on the net like Yahoo's finance, daily finance, etc. we found their data to be accurate and reliable. A lot of key ratios are going to be mentioned in this article, and hence we think it would be best for investors to get a handle on some of these ratios as they could prove to be very useful in terms of spotting potential winners.

Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders, then they are making; this situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for sometime. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever; if your tolerance for risk is a low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest 5 Plays With Stellar Payment Histories.

Debt to equity ratio is found by dividing the company's total amount of long-term debt (debts with interest rates that have a maturity longer than one year) by the total amount of equity. A debt to equity ratio of 0.5 tells us that the company is using 50 cents of liabilities in addition to each $1 dollar of shareholders equity in the business. There is no fixed ideal number as it depends on the industry the company is in. However, in general a ratio under 1 is acceptable and ideally it should be in the 0.5-0.6 ranges.

Current ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardising their future earnings. Ideally the company should have a ratio of 1 or higher.

Price to free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa; lower ratios are generally more attractive. If a company generated 400 million in cash flow and then spent 100 million on capital expenditure, then its free flow is $300 million. If the share price is 100 and the free cash flow per share are $5, then company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry; this gives you an idea of how the company you are interested in holds up to the other companies within the industry.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of 1 year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa.

Price to tangible book is obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to

Quick ratio or acid -test is obtained by adding cash and cash equivalents plus marketable securities and accounts receivable dividing them by current liabilities. It is a measure of a company's ability to use its quick assets (assets that can be sold of immediately at close to book value) to pay off its current liabilities immediately. A company with a quick ratio of less than 1 cannot pay back its current liabilities. Additional key metrics are addressed in this article 5 Dividend Ideas With Yields As High As 13.4%.

The Williams Companies, Inc.

Basic Key ratios

Levered free cash flow= $-167 million

Percentage Held by Insiders = 0.64

Market Cap ($mil) = 17128

Number of Institutional Sellers 12 Weeks = 2

3M % Chg Short Interest = N/A

Growth

Free cash flow per share Chart

Net Income = 12/2011 = It currently stands at $870 million and could top the $1.09 billion mark.

Net Income =12/2010 = -1.097 billion

Net Income = 12/2009 = 285 million

Net income= 12/2008= 1.41 billion

12mo Net Income this Q/ 12mo Net Income 4Q's ago = 190.45

Q Net Income this Q/ same qtr yr ago = 121.54

Cash Flow ($/sh) 12/2011 = N/A

EBITDA ($mil) 12/2011 = N/A

Cash Flow ($/sh) 12/2010 = 3.96

EBITDA ($mil) 12/2010 = 1190

Cash Flow ($/sh) 12/2009 = 3.54

EBITDA ($mil) 12/2009 = 3040

Net Income Rpt Qtr ($mil) = 272

Anl Net Income this Yr/ Net Income last Yr = -484.91

Sales ($mil) 12/2011 = N/A

Sales ($mil) 12/2010 = 9616

Sales ($mil) 12/2009 = 8255

The chart clearly indicates that net income and operating cash flow took a hit after peaking in 2008. After turning negative in 2010 ($-1.09 billion) net income is set to explode upwards in 2011 and could top the $1.097 billion mark. Total cash flow from operating activities is also set to explode upwards in 2011 and could come in as high as $3.1 billion easily topping the $2.6 billion mark set in 2010.

Dividend history

Div Yield = 3.44

Div Yld 5 Yr Avg 12/2011 = 2.05

Div Yld 5 Yr Avg 09/2011 = 1.99

Annual Dividend 12/2011 = 0.78

Annual Dividend 12/2010 = 0.49

Forward yield = 3.56

Div 5yr Growth 12/2011 = 15.88

Div 5yr Growth 09/2011 = 12.6

R-squared Div Growth 12/2011 = 0.67

R-squared Div Growth 09/2011 = 0.69

In terms of other pipeline plays WMB has a mediocre yield. For example, KMP and BPL both offer higher yields at 5.3% and 6.4%, respectively. The 5 year dividend growth rate though is above average at comes in at 15.88%.

Dividend sustainability

Payout Ratio 12/2011 = N/A

Payout Ratio 09/2011 = 0.51

Payout Ratio 06/2011 = 0.58

Payout Ratio 5 Yr Avg 12/2011 = 0.35

Payout Ratio 5 Yr Avg 09/2011 = 0.35

Payout Ratio 5 Yr Avg 06/2011 = 0.34

Change in Payout Ratio = 0.16

Operating cash flow has started to rise in 2011 (projected to come in as high 3 billion) and it has a manageable payout ratio of 51% so it should have no problem meeting its dividend obligations. Net income has also surged in 2011 and could top the $1.1 billion mark.

Performance

% Ch Price 52 Wks Rel to S&P 500 = 6.59

Std Dev Target Price Est = 2.07

Avg EPS Surp Last 4 Qtr = 16.15

EPS % Change F2/F1 = -0.32

Next 3-5 Yr Est EPS Gr rate = N/A

Std Dev 3-5 Yr Est EPS Gr rate = N/A

EPS Gr Q(1)/Q(-3) = 104.76

5 Yr Hist EPS Gr 12/2011 = N/A

5 Yr Hist EPS Gr 09/2011 = -3.82

Projected EPS growth

ROE 5 Yr Avg 12/2011 = 11.42

ROE 5 Yr Avg 09/2011 = 11.42

ROE 5 Yr Avg 06/2011 = 11.49

Return on Investment 12/2011 = N/A

Return on Investment 09/2011 = 5.23

Return on Investment 06/2011 = 4.78

Debt/Tot Cap 5 Yr Avg 12/2011 = 50.97

Debt/Tot Cap 5 Yr Avg 09/2011 = 51.36

Debt/Tot Cap 5 Yr Avg 06/2011 = 51.69

Current Ratio 12/2011 = N/A

Current Ratio 09/2011 = 1.18

Current Ratio 06/2011 = 1.18

Current Ratio 5 Yr Avg = 1.32

Quick Ratio = 0.87

Cash Ratio = 0.53

Interest Coverage 12/2011 = N/A

Interest Coverage 09/2011 = 3.85

Interest Coverage 06/2011 = 4.03

EPS took a big hit after peaking in 2008 but has turned positive ($1.67). It has an average interest rate coverage ratio of 4.03 and also sports a decent 5 year average current ratio of 1.32

Valuation

Book Value Qtr ($/sh) 12/2011 = N/A

Book Value Qtr ($/sh) 09/2011 = 15.71

Book Value Qtr ($/sh) 06/2011 = 15.38

Annual EPS before NRI 12/2011 = N/A

Annual EPS before NRI 12/2010 = 1.28

Annual EPS before NRI 12/2009 = 0.94

Annual EPS before NRI 12/2008 = 2.15

Anl EPS before NRI 12/2007 = 1.75

Price/ Book = 1.85

Price/ Cash Flow = 7.34

Price/ Sales = 1.65

EV/EBITDA 12 Mo = 21.14

P/E/G F1 = N/A

Q1 Std Dev/ Consensus = 0.09

R-squared EPS Growth 12/2011 = N/A

R-squared EPS Growth 09/2011 = 0.04

P/E F1/ LT EPS Gr = N/A

Std Dev Cons Current Qtr = 0.03

Median Estimate Next Qtr = 0.37

Number Analyst in Cons Q3 = 6

Technical Analysis

A failure to break above 30 on a weekly basis could result in a re test of the 22-24 ranges. The pattern is still weak and for those looking to open up new positions, our advice would be to wait for a re test of the 24 ranges before deploying capital into this play. If it manages to close above 33 on a weekly basis it should be able to put in a series of new highs before pulling back.

Competition

Energy Transfer Equity L P (NYSE: ETE)

It has a levered free cash flow of $-354 million, a current ratio of 0.79 and interest coverage of 1.50

Net income for the past three years

2008 = $375.05 million

2009 = $442.48 million

2010 = $192.76 million

2011= it stands at $224 million and could potentially top the $295 million mark.

Total cash flow from operating activities

2008 = $823.76 million

2009 = $723.47 million

2010 = $1.09 billion

2011= It stands at $1.1 billion and could top the $1.5 billion mark.

Current dividend= 6%

Dividend yield 5 year average = 6.8%

Dividend rate = $ 2.44

Payout ratio = 168%

Dividend growth rate 3 year avg = 8.5%

Dividend growth rate 5 year avg = 23.2%

Consecutive dividend increases = 6 years

Paying dividends since = 2006

Total return last 3 years = 163%

Total return last 5 years = 58%

Buckeye Partners, L.P. (NYSE: BPL)

It has a free cash flow rate of- $63.1million.

Net income for the past three years

  1. 2008= $294 million
  2. 2009= $162.7 million
  3. 2010= $289.4 million
  4. 2011= it stands at $234 million and could top the $280 million mark.

Total cash flow from operating activities

  1. 2008= $350.3million
  2. 2009 =$400.5 million
  3. 2010 = $464.7 million
  4. 2011= It stands at $345 million and could top the $447 million mark.

  1. Current dividend= 6.4%
  2. Dividend yield 5 year Average 6.8%
  3. Dividend rate $4.08
  4. Payout ratio 155%
  5. Dividend growth rate 5 year average 10.8%
  6. Consecutive dividend increases 16 years
  7. Paying dividends since 1990
  8. Total return last 3 years 86%
  9. Total return last 5 years 60%

Energy Transfer Partners LP (NYSE:ETP)

It has a levered free cash flow rate of -$309 million, a current ratio of 0.84 and an interest coverage ratio of 2.60

Net income for the past three years

  1. 2008= $886 million
  2. 2009= $791 million
  3. 2010= $617 million
  4. 2011= it stands at $462 million and could top the $520 million mark.

Total cash flow from operating activities

  1. 2008= $1.28 billion
  2. 2009 =$826.8 million
  3. 2010 = -$1.202 million
  4. 2011= It stands at $730 million and could top the $1.2 billion mark.

  1. Current dividend= 7.7%
  2. Dividend yield 5 year Average 7.80%
  3. Dividend rate $ 3.58
  4. Payout ratio 260%
  5. Dividend growth rate 5 year average 5.71%
  6. Consecutive dividend increases 6 years
  7. Paying dividends since 1996
  8. Total return last 3 years 64%
  9. Total return last 5 years 20%

Kinder Morgan Energy Partners, L.P (NYSE:KMP)

KMP has a huge free cash flow rate of $1.7 billion as of Sept, 2011.

Net income for the past three years

  1. 2009= $1.30 billion
  2. 2010= $1.26 billion
  3. 2011= 1.31 billion
  4. Projected 2011= It stands at $781 million and could top the $1.2 billion mark.

Operating cash flow the past three years has been on the rise

  1. 2009= $2.2 billion
  2. 2010= $2.17 billion
  3. 2011= 2.41 billion
  4. Projected 2011= it stands at $1.98 billion and could top the $2.7 billion mark.

  1. Current dividend 5.3%
  2. Dividend yield 5 year Average 6.5%
  3. Dividend rate $ 4.61
  4. Payout ratio 283%
  5. Dividend growth rate 5 year average 7.26%
  6. Consecutive dividend increases 16 years
  7. Total return for the past 5 years= 110%
  8. Total return for the past 3 years= 102%
  9. Total return for the past 12 months= 25%

Other key important raitos

Price to Sales = 2.44

Price to Book = 2.59

Price to Tangible Book = 3.84

Price to Cash Flow = 20.00

Quick Ratio = 0.40

Current Ratio = 0.50

LT Debt to Equity = 1.54

Total Debt to Equity = 1.78

Interest Coverage = 3.30

Conclusion

Now that it has spun off its upstream operations via a tax-free spinoff (WPX Energy, Inc. Common Stock) it has become a pure play energy infrastructure company. Operating cash flow and net income should start to rise and in turn so should the dividend payments. It does sport a decent current ratio of 1.18 (five-year average year average 1.35). It has a fair interest coverage ratio at 3.85, net income has exploded in 2011, and operating cash flow has also surged in 2011 (it could top the 3 billion mark); it has a manageable payout ratio and a decent five year dividend growth rate. It has a projected growth rate of 21% for 2012 and 23% per annum for the next five years; click here to view the full report.

Additional bullish factors

Its midstream assets are less sensitive to commodity prices and thus provide it with a steady stream of cash flow regardless of the price the underlying commodity its transporting is trading at. It recently raised its dividend by 25 cents a share indicating that management's commitment to create value for its shareholders. Its dividend should continue to grow in the 12-15% ranges for the next few years.

The massive $12 billion restructuring program has produced a company that has combined its processing units and pipelines in such a way as to simplify its operations, and this will serve to drive growth significantly in the years to come.

Having said that, we feel that there are better plays out there - for example, EPD, MWE and or KMP. 100K invested in WMB for 10 years would have only grown to 143K. Consequently, 100K invested in EPD would have grown to 276K, in MWE it would have grown to 699K and in KMP it would have grown to over $315K. Our stance is not that WMB is not a good long term play, but that there are better pipeline plays out there. Either way, long term investors would be best served by waiting for the markets to pull back before committing fresh sums of money to this market.

All dividend history charts supplied courtesy of dividata.com; a majority of the historical data used in this article was supplied by zacks.com. Free cash flow per share and projected EPS growth charts sourced from zacks.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.