Inter Pipeline Ltd: Should You Buy This Dividend Stock?

Here’s what investors need to know about Inter Pipeline Ltd. (TSX:IPL).

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Dividend investors are constantly on the lookout for top-quality stocks that pay reliable and rising dividends.

The best stocks often trade at high valuations, but once in a while the market serves up a treat, and investors get a chance to buy great yields with a shot at some decent capital appreciation to boot.

Here’s why Inter Pipeline Ltd. (TSX:IPL) should be on your radar.

Strong results

Inter Pipeline delivered record results in Q4 2015 as funds from operations hit $211 million, up 32% year over year. Net income rose to a record $138 million.

The company transports 35% of the country’s oil sands production and 15% of western Canadian conventional oil output. Oil sands operators are delaying expansion plans until the oil market recovers, but they are not going to shut down their facilities. In fact, the oil is still flowing at a healthy clip.

Inter Pipeline completed two major infrastructure projects in early 2015, which contributed to a 62% boost in Q4 funds from operation in the oil sands segment compared with the previous year.

Inter Pipeline also has a growing liquids storage business in Europe that is performing very well. The group reported a 79% year-over-year increase in Q4 funds from operations. Utilization rates jumped from 84% to 97% in the quarter, and the company is getting additional revenue from new assets.

The conventional oil segment also delivered strong results with Q4 funds from operations, hitting a record $51.5 million on throughput that was pretty much in line with the same period in 2014. Continued growth in the Viking light oil play offset a slowdown in other areas.

The company’s natural gas extraction business struggled through most of 2015, but the Q4 numbers were pretty much in line with Q4 2014, generating funds from operations of about $25 million.

Dividend safety

Inter Pipeline recently increased its monthly payout by about 6% to 13 cents per share. The annualized payout ratio is less than 70%, so the distribution looks safe. Investors should view the last hike as a sign that management is confident in the revenue and cash flow outlook for the medium term.

Valuation

Inter Pipeline isn’t as cheap as it was in January, but the stock is still trading 20% lower than it was a year ago, and investors who step in now can secure a 6% yield.

Should you buy?

The easy money has already been made, and another reversal in oil prices would take some air out of the recent rally. However, the long-term prospects look good, and the stock still has significant upside potential if oil continues to move higher.

If you believe the oil market has bottomed and are looking for exposure to the energy sector, Inter Pipeline is an attractive pick with a great dividend.

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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