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Earn Over 7% Yield From This Safe Dividend Stock

Investors has shown little enthusiasm for Inter Pipeline Ltd. (TSX:IPL) stock for the past year. Its stock is down ~23%, and there is a little indication that the recent strength in oil markets is helping this company win back investors’ confidence.

But IPL has just closed a strong 2017, which demonstrates that the company is off to a strong start in 2018 and that this dismal stock performance isn’t showing a true picture about the business’ potential.

IPL is a Calgary-based energy infrastructure company operating four business segments in Western Canada and Europe. Its pipeline systems span over 7,800 kilometers in length and transport approximately 1.4 million barrels per day.

In Europe, IPL operates 16 strategically located petroleum and petrochemical storage terminals, which have a combined storage capacity of approximately 27 million barrels. Its NGL business is one of the largest in Canada, processing an average of 2.8 bcf/d in 2017 with the capacity to produce over 240,000 b/d of NGL.

Fourth-quarter earnings

IPL reported a strong gains in Funds From Operations (FFO) in the fourth quarter, registering a 5% growth to $268 million from the same period a year ago. This strength mainly came from NGL processing business, which generated record quarterly FFO of $91 million, up 40% from the same period last year.

Sales for the quarter rose 10.3% to $618 million, while the net income attributable to shareholders in the quarter surged ~13% to $142 million.  For 2017, FFOs increased by 17% to $990.6 million.

A solid dividend stock

With an annual dividend yield of 7.4%, IPL has a solid history of rewarding its investors. In November, the company hiked its payout by 3.7% to $1.68 per share annually, marking its 15th consecutive dividend increase.

IPL’s high dividend yield may keep some risk-averse investors on the sidelines, but I don’t think these dividend payments are under threat. The company is increasing its cash flows and maintaining a healthy payout ratio, which was 59% for the fourth quarter.

During the recent oil slump, IPL strengthened its position in the industry, acquiring Williams Canada for $1.35 billion. It also plans to build a $1.85 billion polypropylene manufacturing plant by 2021. These growth initiatives have put the company in a position to produce steady cash flows for its investors in the years to come.

The bottom line

IPL’s stock is currently trading at 16.2 times fiscal 2017’s EPS and 14.6 times the consensus EPS estimate for 2018. Both ratios suggest that IPL stock is undervalued when you compare them with its five-year average multiple of 23.2.

Trading at $22.82 at the time of writing, IPL stock offers a good value for long-term income investors. The company generates most of its revenue and cash flows from long-term, fee-based contracts. This certainty in its revenues reduces the company’s exposure to volatile energy prices, making the stock a stable provider of monthly income.

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Fool contributor Haris Anwar has no position in the companies mentioned.

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