As part of the discussion surrounding whether Williams Companies' (NYSE:WMB) shareholders should approve the merger with Energy Transfer Equity (NYSE:ETE), the energy infrastructure company predicted the likelihood of a big dividend cut. At the time, the announcement seemed more like a warning to scare shareholders into voting in favor of the deal.
With the failed merger out of the way, Williams can now get back to business. The first quarterly results since the merger provided the pipeline company the opportunity to outline the new dividend and investment strategy for the majority owned Williams Partners (NYSE:WPZ).
Ironically, the picture isn't the dire situation outlined via the warning of a dividend cut. As a reminder, Williams made the following statement regarding the dividend among others:
In the event the transaction is not completed, the Williams Board expects to reduce the level of the dividend beginning in the third quarter of 2016. The amount of any dividend reduction has not yet been determined but could be material.
While a dividend cut appeared warranted, the company had a financial picture and dividend coverage ratio that didn't suggest such a scary proclamation. My previous research questioned the dire view presented by Williams.
Now with the activist hedge funds off the board of directors, the company has a slightly different and more positive tune regarding the dividend. Sure Williams cut the dividend by 69% to only $0.20 per quarter, but the company is reinvesting the savings directly back into the growth projects at Williams Partners.
Williams is now scheduled to invest approximately $1.7 billion over the next 18 months directly back into Williams Partners via a dividend reinvestment program. The new yield is still an appealing 3.1%.
Source: Williams Q216 presentation
The reality is that the dividend cut is to invest in growth without taking on debt, not due to a strained financial position as the original statements would suggest. The company is paying out $0.80 in annual dividends while investing an annual rate of $1.3 billion back into Williams Partners. With 750 million shares outstanding, the pipeline company could easily continue to pay a juicy dividend to investors if not for the growth opportunities with natural gas demand growing.
Even under the current scenario, the dividend yield is close to the levels where the yield sat back prior to 2015.
The key investor takeaway is that the dividend cut at Williams is related more to investment opportunities than weak financials. The stock has rallied in the last couple of days, but investors will quickly start looking towards a big dividend hike in 2018 as distributions improve at Williams Partners and the cash flows support a substantially higher dividend payout in a normal environment. The stock likely continues heading higher.
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