Williams Companies Inc Just Put Its 4% Dividend on a Rock-Solid Foundation

By Matthew DiLallo Markets Fool.com

Over the past several months,Williams Companies (NYSE: WMB) has unveiled several strategic initiatives to firm up its financial foundation. The company put a cap on that strategic transformation this week when its MLP,Williams Partners (NYSE: WPZ), announced a deal to sell its interest in a petrochemical plant for $2.1 billion. It's an agreement that significantly strengthens the financial profile of both companies, which gives investors further confidence in the sustainability of Williams' dividend and the viability of its growth plan.

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Details on the deal

Last September, Williams Partners announced that it had initiated a process to explore the monetization of its 88.5% interest in the Geismar olefins plant in Louisiana. At the time, the company said it was open to both a sale of its stake in the facility or a long-term fee-for-service agreement. Either outcome would enable the company to reduce its exposure to commodity prices so it could focus on generating consistent cash flow from fee-based assets to support its distribution and Williams' dividend.

Image source: Getty Images.

In the end, the company chose to accept an offer from NOVA Chemicals, which agreed to buy its stake in the facility for $2.1 billion. Further, NOVA signed a long-term fee-for-service agreement with Williams Partners, which will supply feedstock to the plant via its Bayou Ethane Pipeline. As such, the deal gives the company upfront cash and a steady cash flow stream.

How this will affect Williams' dividend

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Williams Partners intends to use the cash infusion to pay off its $850 million term loan, with the balance going toward pre-funding future capital investments. That will enable the company to strengthen its credit profile and likely push its leverage ratio below 4.5 times debt to EBITDA, providing further support to its investment-grade credit rating. Meanwhile, with $2.1 billion to $2.8 billion in growth capital projects already lined up this year, Williams Partners shouldn't have any problem replacing the lost cash flow from Geismar since it can reinvest the money into its high-return projects that will deliver steadier cash flow. As a result, this transaction, when combined with a previous financial repositioning transaction with Williams Companies, further reduces Williams Partners' need for outside capital to finance future growth.

The other thing this deal does is increase Williams Partners percentage of gross margin from fee-based sources from 93% to 97%, which is among the highest in the energy midstream industry. That gives the company clear visibility on future cash flow, providing further support for the dividend.

That combination of a strengthening financial foundation as well as enhanced cash flow visibility further supports the growth targets Williams announced earlier this year. These objectives were that Williams Partners would increase its distribution by 5% to 7% per year over the next several years, while maintaining at least a 1.1 times coverage ratio, which would enable Williams Companies to increase its dividend by 10% to 15% annually while also maintaining at least 1.1 times coverage. Both represent healthy income growth for investors.

Investor takeaway

This deal is great news for income investors. That's because it not only strengthens Williams' ability to maintain its high yield by further securing cash flow, but it gives the company's MLP the low-cost capital it needs to complete expansion projects. That increases the likelihood that the companies will meet growth expectations, potentially positioning them to deliver dividend growth toward the high end of the guidance range.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.