Should we Merge our Dividends? WMB

Here is a risky dividend play for us and borderlines breaking one of our rules of investing.  On an off note, natural gas main component is methane.  Methane chemical Formula is CH4, or 1 carbon atom and 4 hydrogen atoms.  Now, should we merge our dividends.

CH4

Background

Williams Companies (WMB) is a natural gas pipeline and has pipeline in at least 20 states and they have 13,600 miles of pipelines.  They also gather, treat, process, and compress natural gas.  They also have additional services around natural gas usage. Founded in 1908 and they are based in Tulsa, Oklahoma.

Valuation

With the merger between Williams Companies (WMB) and Energy Transfer (ETE), it is giving us a great value to purchase today.  While they do not have earnings right now, their price / cash flow is a 4, which is a good price.  Their current dividend yields of 12.8% is great and very high.  While a high dividend like this is worrisome, we believe the merger is the reason for the reduce stock price to keep the dividend high.  Their dividend to cash flow is 55%, which we believe makes it safe.  While the price of natural gas is low, they get paid to transport it.  The risk comes from their customers running into trouble, which eventually makes them run in trouble.  However, we believe the long term of natural gas is too the good.  More and more power plants are using natural gas and we are exporting more and more of it.  With these trends, the demand will increase, which should increase natural gas prices, which will increase profits for their customers, which will increase Williams Companies (WMB) profits. So while they have weakness now, we believe the future will allow them to grow.


Merger

The merger is a lot of concern.  It approved by management, but there is a good chance that it will not go through.  We believe there is 3 options to the merger.

  1. The merger goes through: If it does, I will either get cash or shares in a new corporation.  From what I read, if it does, I will make a near term profit.  While I am not looking for a near term profit, if this is a worse case, that is not bad.  If this one happens, it is borderline breaking one of our rules, which is not planning on selling our shares.
  2. The merger does not go through: The merger is taking away a lot of the focus of growing or making the company more efficient.  If the merger is stopped, the stock feels like it will go up, and I will have a great company at a good price with a great dividend.  This is the one we hope happens.  This will move us quickly past this merger distraction.
  3. The merger does not go through and Energy Transfer (ETE) pays Williams Companies (WMB) a breakup fee: With the breakup fee, they could really go up with an infusion of cash.  While we would like our company to get a large cash infusion, this could become an endless court battle and be a distraction for years to come.

Dividend

Williams Companies (WMB) is a dividend powerhouse right now with a 12.8% dividend yield.  While this is high, it is only 55% of cash flow.  They have paid an increasing dividend for at least 12 years, making them a dividend contender. We believe they will keep this record up, unless the merger goes through.

What I bought

We bought 14 shares of Williams Companies (WMB) for $286.69, including those natural commissions we keep paying. This will add $35.84 a year to our dividend payments.  While natural gas prices and the merger are current headwinds, this give us a good entry point for a natural gas pipeline.

Should we merge our dividends with Williams Companies (WMB).  Please feel free to add your thoughts below in the comment section.

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Disclosure:

  • WMB – We own shares.
  • ETE – We do not own shares

 

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