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Inter Pipeline Ltd. Yields 7.5%: Should You Buy This Stock?

Inter Pipeline Ltd. (TSX:IPL) is down more than 35% in the past 12 months.

With the dividend now offering a yield of 7.5%, investors are wondering if the pipeline and storage niche player is capable of maintaining the payout until better days arrive in the energy patch.

Let’s look at the situation to see if the company deserves to be in your dividend portfolio.

Operations

Inter is a specialty player in the western Canadian oil space. The company carries about 15% of western Canada’s conventional oil output and 35% of oil sands production.

Inter’s other main business segment is liquids storage, which is primarily located in Europe.

The rout in the energy market has forced Inter’s main pipeline customers to cut back on expansion projects, but these companies are big players with strong enough balance sheets to ride out the tough times, and they are going to keep producing oil.

Cash flow situation

The market is concerned that spending cuts by oil producers will reduce demand for new pipelines and impede Inter Pipeline’s ability to grow and subsequently raise the dividend.

That’s certainly the case in the short term, but the company should be able to sustain its current payout until the market recovers.

Inter Pipeline reported Q3 2015 net income of $128 million, up $33 million from the same period in 2014. Funds from operations came in at $205 million in the quarter and the company spent just under $56 million on capital expenditures, which means the business generated $149 million in free cash flow. Dividend payments only ate up $123.5 million, so the cash flow was more than adequate to cover the commitments.

Market segments

The company’s oil sands transportation segment delivered a 77% increase in funds from operations in Q3 2015 compared with the previous year. The increase was the result of two new projects that were completed in early 2015.

The storage business is also doing well. Utilization rates in the European operations rose from 78% in Q3 2014 to 93% in Q3 2015, and Inter Pipeline is wrapping up the completion of a new storage facility in Saskatchewan that will add 400,000 barrels of capacity in 2016. This should provide a nice boost to cash flow by the end of the year.

Dividend

Inter Pipeline pays a monthly distribution of 13 cents per share. The payout ratio in Q3 was 64% and about 69% for the first three quarters of 2015, so the situation looks pretty good.

Should you buy?

The energy sector continues to weaken and capital projects are being dropped at an increasing rate. The prospect for further dividend growth is probably bleak for the near term, and the stock might continue to fall with the market, but the existing dividend looks safe.

If you have a buy-and-hold investing style, Inter Pipeline looks like a reasonable pick and there could be some nice upside on the stock when oil reverses course.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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