3 Reasons Income Investors Should Buy Inter Pipeline Ltd.

Here’s why dividend investors should consider Inter Pipeline Ltd. (TSX:IPL) for their income portfolios.

The Motley Fool

Inter Pipeline Ltd. (TSX:IPL) lies in the shadows of its larger peers, but investors with an appetite for yield and growth are starting to take notice.

The company plays an integral role in the transportation of western Canadian hydrocarbons. In fact, in 2014 Inter carried about 35% of oil sands production and 15% of the region’s conventional oil output. Inter also operates large liquids storage operations in Europe.

Here are the reasons why I think you should consider Inter Pipeline for your dividend portfolio.

1. Earnings strength

The ongoing rout in the Canadian energy patch is keeping investors away from anything connected to the sector. Drilling companies are certainly feeling the heat, but the midstream operators are seeing strong demand for their services.

In its Q1 2015 earnings statement Inter Pipeline generated record funds from operations of $177 million, or $0.53 per share. This translates into a 34% increase over the same period in 2014. Net income for the quarter hit a record $123 million. A 28% year-over-year increase in transportation volumes drove the record gains.

2. Continued growth

During the first quarter Inter Pipeline completed $1.6 billion in projects along the Cold Lake and Polaris pipeline systems in Alberta. The company also initiated a 400,000 barrel crude oil storage expansion project in Saskatchewan. These projects should deliver significant cash flow for decades.

Inter’s strong presence in Saskatchewan is important because capital could start to shift out of Alberta in the wake of the NDP election win. Saskatchewan’s oil sector is enjoying strong production growth and fears about royalty and tax increases in Alberta could push companies with operations in both provinces to allocate more development funds to their assets in Saskatchewan.

3. Dividends and capital appreciation

Inter Pipeline pays a monthly dividend of 12.25 cents per share. This is helpful for income investors who rely on divided payments to top up pension payments.

On an annualized basis, shareholders receive $1.47 per share and that yields about 4.7%.

Investors who don’t need the cash every month should take advantage of the company’s generous dividend reinvestment plan (DRIP). Under the DRIP shareholders can receive their dividend payments in the form of new shares and Inter gives you a 5% discount on the stock price as an incentive to do this.

Using a company’s DRIP is a great way to use the power of compounding to build a substantial portfolio.

Inter’s payout ratio in the first quarter was 73%, which means the dividend should be safe, but increases to the distribution will be limited until the new projects start driving higher cash flow.

Inter’s stock price has increased 175% in the past five years. That’s not bad for a niche market pipeline operator.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

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