Beware WMB Stock’s Lofty Yield
On the surface, Williams Companies Inc (NYSE:WMB) stock looks solid.
The company owns pipelines and storage facilities—a traditionally safe business. The stock also sports a 17% yield—almost seven-times the payout of the S&P 500.
A payout this high, though, is a bit like Bigfoot riding the Loch Ness monster on the believability index. When you see yields like these, you have to ask why. And in the case of WMB stock, there’s reason to be nervous.
Is This Dividend Safe?
Pipeline stocks like Williams Companies were once home runs.
They were the “tollbooths” of the oil patch, earning fees on each barrel shipped. Sure, energy prices could swing all over the place. The actual volume of crude moved, though, remained steady from year to year.
As a result, pipeline profits were like bond coupons. Growing shale output boosted cash flows, too. And because costs were only a fraction of revenues, most of these earnings were paid out to owners.
Williams Companies stock was especially promising. Last year, the firm announced a merger with Energy Transfer Equity LP (NYSE:ETE). The companies, once combined, will create a pipeline powerhouse.
Yield hogs could be the biggest winners. Most of the cost savings will be passed on to investors in the form of higher distributions. In other words, just closing the deal later this year could result in an instant dividend hike.
At least, that was the idea.
Over the past six months, the industry has been turned on its head. Drillers are now drowning in a sea of $30.00 crude. Producers have been slashing dividends just to keep the lights on.
The impact of cheap oil is starting to trickle down the supply chain. Drillers are slashing production. And with shale companies dropping like flies, pipeline profits are drying up as well.
Williams Companies could be hit hard. Last week, Chesapeake Energy made headlines on reports the firm hired bankruptcy attorneys. Given Chesapeake represents a huge part of Williams’ revenues, this is a big worry. More partners could follow.
Other parts of the story are falling apart, too. Williams was supposed to spend billions on new pipelines and other projects. However, last quarter, the company slashed its growth budget. Management has cancelled and deferred millions of dollars in new initiatives.
Even the merger could be in trouble. Williams’ board of directors is committed to the deal. Energy Transfer Equity is also on board. But since the announcement, conditions have changed a lot. Analysts aren’t so sure this deal will close.
All of this means Williams’ dividend could be at risk.
Management is doing whatever it can to hold the line: raising debt, issuing shares, and cutting expenses.
Asset sales could also raise cash, but given how bad business is right now, Williams is unlikely to earn top dollar on any divestments. Sure, this could keep the dividend going for a little longer; shareholders, though, are paying a huge price for a few distribution checks.
You don’t need an MBA to see a problem here. However, it’s hard to tell when—or even if—the company will cut its dividend. Management could pull more rabbits out of the hat to keep the checks coming.
But if you’re tempted by Williams’ juicy yield, just remember that it’s high for a reason.
The Bottom Line on WMB Stock
Oil guys tell me, “Rob, you need to be positive.” Well, I’m positive some dividends will be cut.
WMB stock isn’t the only distribution that could be in trouble. With fewer wells being drilled, pipeline stocks are in for a world of hurt. Investors should brace themselves for a wave of payout cuts.
Not everyone is at risk. Some will survive. But for now, be aware that once safe dividends could dry up.