Inter Pipeline Ltd. (TSX:IPL) is down 33% this year, and dividend investors are wondering if the sell-off is a good opportunity to start a position in the stock.
Let’s take a look at the current situation to see if the company deserves to be in your dividend portfolio.
Inter Pipeline lies in the shadows of its larger pipeline peers, but the company serves a very important role in the movement of western Canadian oil.
Inter Pipeline moves about 35% of oil sands production and 15% of western Canadian conventional oil output. The company also has a storage business with operations in both Canada and Europe.
With the oil rout lingering longer than expected, the market is concerned that Inter Pipeline will have a tough time finding new projects, and that would mean no new dividend hikes.
Those concerns are certainly valid, but the sell-off looks a bit overdone.
Cash flow and earnings
Inter Pipeline reported record Q3 2015 net income of $128 million, up $33 million from the same period last year. Funds from operations came in at $205 million, or $0.61 per share, a 46% increase over Q3 2014.
The company’s oil sands transportation segment continues to do well, with a 77% increase in funds from operations. Inter Pipeline completed the construction of two new projects earlier this year, and those assets are now in service.
The storage business is also having a strong year. Average bulk liquid storage utilization rates in Europe hit 93% in the third quarter, up from 78% in the third quarter last year.
Inter Pipeline is building a new storage facility in Saskatchewan that will add 400,000 barrels of capacity in 2016.
Inter pipeline pays a monthly dividend of 12.25 cents per share that yields about 6.5%. The payout ratio in the third quarter was 64%, so there appears to be sufficient funds to support the distribution.
Should you buy?
Inter Pipeline’s oil clients are large players with production horizons that span decades. The current downturn in the energy sector is slowing the pace of expansion, but output is still rising at a number of the major facilities tied into the company’s network, and that should ensure strong cash flow going forward.
Further weakness in the stock is certainly possible, but a rebound in oil prices could send the shares significantly higher in a short period of time. At this point, the stock looks attractive and the distribution should be very safe.