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Should You Buy Pembina Pipeline Corp. Today?

Pembina Pipeline Corp. (TSX:PPL)(NYSE:PBA) shares have performed decently in the last 12 months, as they have appreciated about 9%. Additionally, its monthly dividend per share is nearly 6.3% higher than it was a year ago.

Are Pembina Pipeline shares a good buy today? Can you expect future dividend growth? Before answering these questions, let’s take a look at Pembina Pipeline’s business.

A business overview

Pembina Pipeline transports and provides midstream services in North America. Its pipelines transport natural gas and hydrocarbon liquids products, which are primarily produced in western Canada.

The company also has gas-gathering and processing facilities and an oil and gas liquids infrastructure and logistics business. As a result of Pembina Pipeline’s integrated operations, it offers a full spectrum of midstream and marketing services to the energy sector.

The Veresen merger

In early May, Pembina Pipeline revealed that it is working on a merger with Veresen Inc. (TSX:VSN). The combined company will have a diversified portfolio with crude oil, liquids and natural gas pipelines, terminal, storage and midstream operations, gas-gathering and processing facilities, and fractionation facilities.

The combined company will maintain an investment-grade S&P credit rating of BBB and offer a blended yield of 5%, which is higher than Pembina Pipeline’s current yield of 4.7% and Veresen’s current yield of nearly 5.5%.

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After the merger, which is expected to close by the early part of the fourth quarter, the combined company’s operating segment diversification is estimated to be as follows in 2018: pipelines (58% of earnings before interest, taxes, depreciation, and amortization (EBITDA)); midstream for natural gas liquids and crude (25% of EBITDA); processing (17% of EBITDA).

Its hydrocarbon mix is anticipated to be diversified roughly equally across gas (35% of EBITDA), crude oil (33%), and natural gas liquids (32%).

Furthermore, the combined entity will have more than 85% of contracted cash flow generation through 2022, and $6 billion of near-term secured projects. Both will improve the safety of its dividend.

By 2018, the combined company aims for a sustainable payout ratio of about 80% based on its distributable cash flow generation. It also intends to increase its monthly dividend from $0.17 to $0.18 per share once the merger closes.

What are Pembina Pipeline’s near-term prospects?

Pembina Pipeline is a reasonable investment in a generally expensive market. The analyst consensus at Thomson Reuters has a 12-month mean price target of $49.60 per share on the stock, which represents 15% upside potential from Friday’s market close of about $43 per share. That implies near-term total returns of about 20%.

Investor takeaway

The Veresen merger will improve the quality of Pembina Pipeline’s portfolio, cash flow, and dividend. Pembina Pipeline’s shares are reasonably priced at about $43 per share and will offer a starting yield of 5% after the merger closes by early Q4. An investment today has the potential to deliver total returns of about 20% in the next 12 months.

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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 Kay Ng has no position in any stocks mentioned.

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