High-Yield The Williams Companies On Track For New Highs

Midstream Operator The Williams Companies Raises Guidance 

The Williams Companies NYSE: WMB have proved the U.S. midstream operators are not only immune to the global supply chain issues but benefiting from higher prices as well. The company reported record volume and contracted capacity for the fiscal 3rd quarter and sees demand holding strong for the foreseeable future. What this means for investors, and income investors, in particular, is The Williams Companies’ very high 5.75% yield is as safe as ever. 

Based on our view of the market, investors would not be out of line to expect another increase with the next declaration. The question is how big of an increase will it be? The company has worked hard to improve both its leverage and dividend coverage ratios, earnings are strong and guidance is positive so it could be a bit larger than the low single-digit increases the company has been giving. 

The Williams Companies Had A Strong Quarter 

The Williams Companies reported $2.47 billion in consolidated revenue for a gain of 28% over last year and 24% over 2019. This is not only strong, but more than 1800 basis points better than expected and driven by strength in all reporting segments. On a segment basis, the West segment saw the most robust growth at 20% while Northeast G&P grew 12% and Gulf of Mexico and Transmission a tepid 1%. 

Moving down to the earnings the margin news is a bit mixed but there is a caveat to be aware of. While The GAAP earnings fell YOY and missed the consensus by $0.16 the adjusted earnings grew and beat the consensus. The GAAP $0.13 in EPS missed due to unrealized losses associated with derivative trading activities and hedging. In regards to cash flow and real earnings, adjusted earnings are up $0.18 billion and cash flow is up 84%. This, along with internal activities to improve operations, has the company’s dividend coverage up to 2.17X versus last year’s 1.78X and the leverage ratio down to only 4.1X and ahead of schedule. 

Turning to the guidance, the company is increasing its earnings guidance for the year to up 8% at the midpoint or an increase of 600 basis points from the previous guidance. This is accompanied by an expectation for free cash flow to increase and for leverage to hold steady in the range of 4.0X to 4.2X. 

The Analysts Are Bullish On The Williams Companies 

The analysts are overwhelmingly bullish on The Williams Companies but there have been no call-outs yet following the release of earnings. Based on the results and our assessment of the dividend outlook we think that will change soon. The Marketbeat.com consensus price target has been moving higher over the last 90 and 30 days with the bulk of the 1000 basis point increase happening within the last 30 days. The consensus of $28.80 assumes the stock is fairly valued at the current levels while the recently set high price target of $33 assumes nearly 15% of upside is still available. 

The Technical Outlook: The Williams Companies Is Moving Higher 

Shares of The Williams Companies staged a nice little rally in the days leading up to the Q3 report and are now in consolidation. Assuming consolidation continues at the current levels, the move bears the look of a rally and continuation that could send shares up to the $32.00 to $32.50 level fairly soon. The indicators are a little mixed but consistent with this outlook and support the idea of higher prices. If price action can get above the $32.50 level we see momentum building to drive this stock back up toward its 2015 highs or roughly 80% to 90% upside from the current price action.