The Canadian equity market is full of companies offering dividend investors juicy yields, but big yield often comes with oversized risk.
Let’s take a look at Inter Pipeline Ltd. (TSX:IPL) to see if it is a safe pick right now.
Niche player in pipelines
The oil rout has really knocked the snot out of any company connected to the energy sector, and Inter Pipeline has not been spared.
The company plays a key role in the transportation of western Canadian oil with a specific focus on the oil sands producers. Inter Pipeline operates more than 7,000 km of petroleum infrastructure and carries about 35% of oil sands production as well as 15% of western Canada’s conventional oil output.
The market has taken the stock down about 30% this year on concerns that oil sands expansion will stagnate for years. That would reduce Inter Pipeline’s growth opportunities and put a lid on dividend hikes.
Those concerns are certainly valid, but the company’s clients are not going to go out of business.
Inter Pipeline has long-term contracts with its oil sands customers, and those companies will continue to produce as much as possible in a low-price environment because they need to generate enough revenue to cover operating expenses at the production sites. Shutting the facilities down isn’t really an option because it would cost too much money.
Inter Pipeline also owns storage facilities in Canada and Europe. At the moment the company is building a $65 million storage facility in Saskatchewan that will add 400,000 barrels of capacity in 2016.
Across the ocean, Inter Pipeline is one of Europe’s largest independent tank-storage companies.
Inter Pipeline reported Q2 2015 funds from operation of $181 million, nearly 38% higher than the same period in 2014. Year-over-year net income rose 12%.
The company pays a monthly dividend of 12.25 cents per share that currently offers a 5.7% yield. That looks sustainable because the payout ratio is only 72%.
Should you buy Inter Pipeline?
The stock looks attractive at the current price. Investors might not see increases to the distribution for a year or two, but there shouldn’t be any risk of a near-term cut to the payout. If oil prices recover next year, the stock should get a nice boost.
At this point, it might be worth taking a small position to get ahead of the curve.