Inter Pipeline Ltd.: Is the 6% Dividend Still Safe?

Inter Pipeline Ltd. (TSX:IPL) has an attractive yield. Is it sustainable?

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Inter Pipeline Ltd. (TSX:IPL) offers an attractive yield, but troubles in the energy sector have some investors concerned about the sustainability of the payout.

Let’s take a look at the current situation to see if this stock should be in your dividend portfolio.

Earnings

Inter Pipeline just reported solid Q1 2016 earnings. The company generated funds from operations (FFO) of $186 million, up 5% from the same period last year. Net income for the quarter came in at $105 million, or $0.31 per share.

Inter Pipeline has a diverse revenue steam with operations in four business segments.

The oil sands transportation division delivered $139.4 million in FFO in the quarter, up 7% year over year. New assets and improved throughput on the system should ensure continued growth in the coming years.

The conventional oil pipelines generated FFO of $50 million, also up 7% compared with 2015. This part of the industry is struggling under weak oil prices, but Inter Pipeline is still seeing growth on its infrastructure in Saskatchewan’s Viking light oil play.

The bulk liquid storage operations in Europe had a very strong quarter, delivering FFO of $31.3 million, a 53% increase over Q1 2015. The addition of new assets and higher utilization of the company’s facilities are responsible for the impressive gains.

Inter Pipeline’s NGL extraction business had a challenging quarter. The unit generated FFO of $23.6 million, down from $28.7 million last year.

Overall, the company is doing very well in a difficult environment.

Dividend safety

Inter Pipeline raised its monthly dividend by 6% last November to 13 cents per share. The payout ratio for the first quarter was 74.6%, so cash flow easily covered the dividend payments.

Most of Inter Pipeline’s revenue is secured under long-term contracts, and the company continues to add new revenue streams.

The firm recently completed a $25 million project on its Polaris system, and the asset should enter commercial service by Q3 of this year. Two new connection projects are also being built on the oil sands pipeline network and these should be in service by the middle of 2017.

The dividend looks safe and investors could see another increase when the new assets begin to generate revenue.

Should you buy?

Inter Pipeline is delivering solid results. The stock is not as cheap as it was a few months ago, but investors can still pick it up for a reasonable price and collect an attractive 6.2% yield while they wait for the broader energy sector to recover.

If you have a bit of cash sitting on the sidelines, Inter Pipeline looks like an attractive pick right now.

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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