3 Reasons Williams Partners LP Is a Better Dividend Stock Than Energy Transfer Partners LP

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With an eye-popping current yield of 11.1%, Energy Transfer Partners (NYSE: ETP) trumps the payout of Williams Partners (NYSE: WPZ), which only yields 6.2% at the moment. However, before investors rush out and buy Energy Transfer on its yield alone, there are three things they need to know about how it differs from Williams Partners. Those three, in my opinion, make Williams the better income stock, especially for risk-averse investors.

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No. 1: Williams Partners currently has a stronger financial profile

Both Williams Partners and Energy Transfer Partners spent the past year undertaking a series of strategic initiatives to shore up their financial situation. Energy Transfer Partners, for example, combined with an affiliated master limited partnership, which significantly improved its distribution coverage ratio from an unsustainable sub-1.0 times to a healthier ratio of greater than 1.0 times. In fact, coverage was a solid 1.13 times last quarter, up from an unsustainable 0.87 times in the first quarter of 2016. Over the longer term, Energy Transfer hopes to maintain at least 1.0 times coverage even as it increases its payout. Furthermore, the company is on track to meaningfully improve its leverage ratio from well over 5.0 times debt to EBITDA to a more comfortable 4.0 times over the next year.

Williams Partners, likewise, accomplished many of the same goals by jettisoning assets and completing a financial repositioning transaction with its parent company, Williams Companies (NYSE: WMB). As a result of those moves, the company leverage will be a comfortable 4.25 times this year, while distribution coverage will be a healthy 1.17 times. The company also expects to maintain greater than 1.1 times coverage in the coming years even as it plans to increase the payout 5% to 7% annually. 

That said, with stronger coverage and leverage metrics already, Williams Partners is already on a sustainable long-term footing, while Energy Transfer is still trying to get there.

No. 2: Energy Transfer's construction problems aren't going away

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Energy Transfer Partners spent much of last year in the headlines. Some of that was due to parent company Energy Transfer Equity's (NYSE: ETE) ill-fated attempt to acquire Williams Companies. That said, most of the other headlines related to the troubles completing construction of its controversial Dakota Access Pipeline, which faced intense opposition due to concerns it might leak and damage drinking water and the environment. While it was able to finish construction on that pipeline earlier this year, a federal judge recently ruled in favor of one of the pipeline's opponents, which might lead to an additional environmental analysis and could cause oil to cease flowing. Making matters worse, the pipeline started leaking oil at a pumping station earlier this year, which has only revived fears that it could cause problems down the road. That's on top of a string of other controversial issues involving the company and its actions during the construction of that project. 

Unfortunately for investors, the problematic Dakota Access Pipeline doesn't appear to be an isolated issue. That's because it has also run into trouble during construction of its Rover Pipeline in Ohio and had to halt construction after drilling fluids leaked into wetlands. Worse yet, some of the leaked fluids contained diesel, which wasn't what the company said would be in those fluids.

These issues could make it harder for Energy Transfer Partners to win approval to build new pipelines in the future, which might cause it to lose out to rivals. While Williams Partners isn't immune to construction delays, it doesn't have a tarnished image like Energy Transfer.

No. 3: Williams eliminated this costly fee, while Energy Transfer only provided temporary relief

One of the things Williams Companies and Williams Partners accomplished in their financial repositioning transaction earlier this year was the elimination of incentive distribution rights (IDRs), which had given Williams Companies an outsized share of Williams Partners' distributable cash flow. By eliminating that fee, Williams Partners' investors are now equal partners will Williams Companies when it comes to sharing the profits.

That's not the case at Energy Transfer Partners, which still sends an outsized portion of its distributable cash flow to Energy Transfer Equity. Last quarter, for example, it generated $907 million of distributable cash flow, $806 million of which it distributed to partners. Of that amount, only $567 million went to public unitholders, with the rest heading to Energy Transfer Equity, including $15 million from its ownership of common units and $224 million from a combination of its general partner interest and the IDRs. In other words, the company received 30% of the cash distributions despite owning just a small fraction of the common units. In fact, it was entitled to receive another $157 million in in distributable cash flow, but agreed to reduce its IDR requirements for seven quarters so it could provide additional support to its MLP. That payout means Energy Transfer's parent and not its partners will receive the lion's share of cash flow growth in the coming years.  

Investor takeaway

While Energy Transfer Partners offers investors a higher yield, they need to take on more risk in return. That risk comes in the form of weaker financials, a history of construction problems, and the drag of hefty IDR payments to its parent. Those three reasons are why Williams Partners is the better option for income investors.

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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.