The pullback in the Canadian market is giving income investors a chance to pick up some quality names at very attractive prices.
Let’s take a look at Inter Pipeline Ltd. (TSX:IPL) and RioCan Real Estate Investment Trust (TSX:REI.UN) to see if they should be in your portfolio.
Inter Pipeline plays a key role in the transportation of western Canadian crude oil. The company moves 35% of Canada’s oil sands production and about 25% of the region’s conventional oil output.
The prolonged slump in the oil patch has taken a toll on any name connected to the sector, and Inter Pipeline is now down more than 30% over the past 12 months.
As energy companies scale back capital spending, Inter Pipeline’s growth prospects become questionable. That’s why investors have run for the exits, but the sell-off looks overdone.
Inter Pipeline’s core clients are large players with production horizons that span decades. The near-term outlook isn’t great, but these companies have the means to ride out the storm and are going to keep production steady, or even push it higher, regardless of the price of crude.
Shutting down an oil sands facility is simply too expensive. As long as operating costs can be covered, the plant will run at full tilt.
The oil sector is definitely struggling, but Inter Pipeline continues to deliver solid results. Net income for Q3 2015 came in at a record $128 million and funds from operations hit $205 million, or $0.61 per share.
Inter pays a monthly dividend of 12.25 cents that yields about 6.6%. The Q3 payout ratio was 64%, so the distribution looks safe.
RioCan owns 340 retail properties in the United States and Canada. Investors have knocked the shares down about 15% in the past six months as concerns build around a weakening Canadian economy, the impact of online shopping, and higher interest rates in the United States.
RioCan’s anchor tenants are big companies with strong brands. They also tend to be businesses that sell recession-resistant products such as groceries, pharmaceuticals, discount goods, and everyday household products.
An economic downturn can certainly cause consumers to tighten their belts, but most of RioCan’s clients are more than capable of riding out some tough times.
The online shopping risks for RioCan’s core clients in Canada is probably minimal given the fact that most people still drive to the store to get their groceries, fill their prescriptions, or pick up a snow shovel.
Higher interest rates are on the way, but the moves are likely to be very small and drawn out, so the impact shouldn’t be that bad.
RioCan reported 5% increase in funds from operations in Q3 2015 compared with the same period last year. The company also renewed 1.3 million square feet of retail space at an average rent increase of 8.6%.
RioCan pays a monthly distribution that currently yields 5.7%.