As the price of crude melted down from $110 per barrel to less than $30 from June 2014 to January 2016, investors dependent on energy-sector dividends got a rude awakening. Their seemingly safe dividends were first cut, then often eliminated all together as energy producers scrambled to conserve cash. The reality of the situation is simple: when a company doesn’t have any control over the price of the product it produces, bad things can happen. Many dividend investors saw the writing on the wall and got out before dividends got slashed. But many others held on, convinced crude would recover….
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As the price of crude melted down from $110 per barrel to less than $30 from June 2014 to January 2016, investors dependent on energy-sector dividends got a rude awakening.
Their seemingly safe dividends were first cut, then often eliminated all together as energy producers scrambled to conserve cash. The reality of the situation is simple: when a company doesn’t have any control over the price of the product it produces, bad things can happen.
Many dividend investors saw the writing on the wall and got out before dividends got slashed. But many others held on, convinced crude would recover. These spurned investors have now made a decision to avoid the sector completely, convinced energy dividends are inherently unsafe.
When it comes to energy producers, I tend to agree with them. But there are still some energy stocks that do offer rock-solid dividends in parts of the sector that aren’t so dependent on the underlying commodity price.
One such company is Inter Pipeline Ltd. (TSX:IPL), an Alberta-based pipeline operator that’s paid 175 consecutive dividends since 1997. Here’s why this company is poised to continue that streak indefinitely.
Approximately 60% of Inter’s earnings come from its oil sands pipelines. This division consists primarily of three huge projects: the Corridor, Polaris, and Cold Lake pipeline systems. Together, these three projects boast 3,300 km of pipeline transporting more than two million barrels of oil per day to refineries in Edmonton.
Because Inter works so closely with oil sands producers, management knew additional projects would come online in the region. The timeline of these projects has been pushed back of late, but it’s only a matter of time until they happen.
Knowing this, management did a very smart thing. Inter’s three main oil sands pipelines have room for an additional 2.3 million barrels of oil per day worth of capacity without having to do much of anything. As new projects like Fort Hills come online (slated to happen in 2017), the extra oil sloshing through Inter’s pipelines will flow right to the bottom line.
Over the last few years, Inter has been making moves to lessen its exposure to the price of crude. These days, some 93% of the company’s EBITDA is from cost-of-service and fee-based contracts. That’s good news in today’s volatile times.
Inter isn’t just in the oil sands, either. Some 20% of its EBITDA comes from its conventional oil pipeline division, a 3,900 km network of pipelines covering from Milk River near the Alberta/U.S. border to Kerrobert in western Saskatchewan. The company also has a natural gas liquids division and a European bulk storage business.
Because Inter has good predictable cash flows, it’s a much better credit risk than most conventional energy producers.
The company currently has a BBB+ credit rating, which indicates the company is on pretty solid financial footing. It has a total of $4.8 billion owing at an average weighted interest rate of 3.9%. That might seem like a lot for a company with a market cap of $9.5 billion, but it’s reasonable.
One thing that really separates Inter from its peers is its dividend. Shares currently yield 5.6%, a big premium compared to two of its major competitors TransCanada and Enbridge, stocks that yield 4% and 3.9%, respectively.
And like I mentioned earlier, Inter has a terrific history of paying dividends. The company hasn’t missed a payout since 1997. And unlike many other income trusts that transitioned back to regular corporations, it didn’t slash its dividend in 2010.
Not only has the company paid dividends, but it’s also done a nice job growing the payout. In 1999 Inter Pipeline paid out $0.64 per share in dividends. 17 years later, the payout is $1.56 per year. That works out to growth of approximately 5.5% per year.
When it comes to dividends, Inter Pipeline is a solid choice. With a solid balance sheet, great assets, and a reasonable payout ratio, look for the payout to continue growing nicely in the future.
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Fool contributor Nelson Smith has no position in any stocks mentioned.