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Is Inter Pipeline Ltd. a Buy at a 6% Yield?

If you’re looking for new and exciting dividend-growth opportunities, shares of Inter Pipeline Ltd. (TSX:IPL) may now be taking the top spot.

After paying the most recent monthly dividend of $0.135, shares of the company declined to a price close to $26, only to close the week at $27.01, offering new investors a forward dividend yield of 6%. The good news doesn’t stop there.

Investors entering the security at these levels are purchasing a company that has consistently increased revenues, profits, and dividends. Since 2013, top-line revenues increased from $1,362 million to $1,824 million in 2016. The compounded annual growth rate (CAGR) of revenues is 10.2% per year.

The CAGR was even better at 30% as earnings per share (EPS), which were $0.60 in 2013, grew to $1.32 in 2016. Dividends didn’t disappoint either, increasing from a total of $1.16 per share in 2013 to $1.56 in 2016. Although the payout may seem high to many, let’s not forget that this is a pipeline with large amounts of long-lived assets and high amounts of depreciation. To make a fair comparison, we must look at the payout ratio as a percentage of cash from operations (CFO).

For 2013, dividends paid totaled $91.5 million out of CFO of $468 million, translating to a 20% payout ratio. In 2014, the payout ratio increased to 27% and then again to 53% in 2015. For the most recent fiscal year, dividends paid as a function of CFO totaled 58%, reflecting a slowdown in the payout ratio.

As the company issued $600 million of stock during the year and almost $1 billion of debt, there is a clear path for further pipeline expansion, which will hopefully continue the strong revenue growth and dividend increases. Shareholders have a lot to look forward to.

Given the company’s recent pullback, it is worth noting that the $26 low experienced during last week is close to the long-term support level, which would equate to a dividend yield of 6.25%. Investors will be jumping for joy to receive a 6.25% dividend yield. The question is, is a yield of 6% enough?

For investors looking for the potential to double or triple their investment, the answer may have to be found elsewhere. For those looking for a relatively defensive security with a current beta of close to 0.4, shares of Inter Pipeline may just be what the doctor ordered.

Although the company operates in the oil industry, it is important to note the company is a pipeline operator and not an oil production company. Whether oil increases or decreases in price, it will not change the fact the oil must be moved.

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Fool contributor Ryan Goldsman has no position in any stocks mentioned.

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