Targa Earnings: A 50% Dividend Increase for 2024 Demonstrates High Confidence in Future Growth

Targa’s TRGP third-quarter results were fairly good, and it boosted its planned dividend for 2024 by 50% to $3 per share. After re-assessing Targa’s growth portfolio across 2024 and 2025, including 1 million cubic feet per day of Permian gathering and processing plants, 240,000 barrels per day of planned fractionation capacity, and the 400,000 barrels per day Daytona expansion, we are boosting our fair value estimate to $79 per share from $72. Our no moat rating remains unchanged.

Our 2024 forecast increases to $4 billion from $3.8 billion and our 2025 forecast increases to $4.8 billion from $3.8 billion. When Targa paid out a $3.64 per share dividend payout in 2019, its EBITDA was $1.4 billion. While a 50% increase is certainly substantial for 2024, we do think it is supportable, with the caveat that it could be cut if Targa needs the capital for a better growth opportunity. For now, Targa’s new capital allocation framework anticipates returning about 40%-50% of operating cash flow to shareholders via buybacks and dividends. Our model currently forecasts about 6%-7% annual dividend growth beyond 2024, and a drop in growth capital spending to $1.5 billion from $2.2 billion annually beginning in 2025, suggests ample capacity to repurchase shares as well. Share buybacks are about $333 million year to date.

Key to Targa’s confidence regarding the large dividend increase is the fee floors across its gathering and processing portfolio. For a material portion of 2023, Targa has benefited from higher margins, as gas and natural gas liquids pricing was below fee floor levels. Targa is working to convert all of its gathering and processing contracts to include fee floors over time.