Inter Pipeline Ltd. Stock: Should You Buy for the 7% Yield?

Inter Pipeline Ltd. (TSX:IPL) might be oversold today. Here’s why.

pipeline

The recent pullback in the Canadian stock market is providing income investors with interesting options to add to their high-yield dividend-growth portfolios.

Let’s take a look at Inter Pipeline Ltd. (TSX:IPL) to see if it deserves to be on your buy list today.

Financial performance

IPL reported record funds from operations (FFO) of $991 million in 2017, thereby representing a 17% year-over-year increase. Net income jumped 10% compared to 2016, as the company saw strong performances from the conventional oil and oil sands pipeline businesses, as well as the natural gas liquids (NGL) extraction assets.

The oil sands transportation segment reported record FFO of $612.4 million, up 5% from the previous year. The fourth quarter numbers were pretty much in line with Q4 2016.

Conventional oil pipeline assets enjoyed an 8% increase in FFO as a result of higher throughput volumes and a strong performance from the midstream marketing activities.

The NGL procession group, which includes assets purchased in 2016 from The Williams Companies for $1.35 billion, generated annual FFO gains of 89%, hitting a record $279.6 million.

The fourth business unit in the mix is IPL’s European bulk liquid storage operations. The division generated FFO of $97.6 million, which was down from $120 million in 2016. Average capacity utilization for the year was 96% compared to 98% in 2016, but a steep drop in utilization in the fourth quarter to 91% hit the overall numbers.

Investors will want to see if the situation in Europe improved in the first quarter of 2018.

Growth

IPL is moving ahead with its $3.5 billion Heartland Petrochemical Complex. The project should be complete by the end of 2021 and management is forecasting long-term average annual EBITDA of $450-500 million from the new assets.

Dividends

IPL raised the dividend last November, representing the 15th consecutive annual dividend increase. The monthly payout of $0.14 per share generates a 7.2% annualized yield based on the current stock price of $23.30 per share.

The 2017 payout ratio was 62%, so investors should feel comfortable with the company’s ability to maintain the distribution while it moves through the development of the Heartland project.

Risks

The stock is down from $28 per share a year ago amid the broader pullback in the energy infrastructure segment. The market is concerned that rising interest rates could bump up borrowing costs and put a pinch on cash flow available for distribution to shareholders.

The issue is valid, especially if rates rise too quickly and companies are unable to boost revenue and cash flow enough to offset increased debt costs.

Should you buy?

IPL’s distribution appears to be safe, and the company’s low payout ratio coupled with the growth outlook suggests that income investors should feel comfortable holding the stock. At this point, the pullback appears a bit overdone, providing new investors with an opportunity to pick up a very attractive yield with a shot at some nice upside when market sentiment improves.

If you have a bit of cash sitting on the sidelines, IPL might be worthy of a small position in your income portfolio today.

Fool contributor Andrew Walker has no position in any stock mentioned.

More on Dividend Stocks

dividend stocks bring in passive income so investors can sit back and relax
Dividend Stocks

2 Great Canadian Stocks That Just Raised Their Payouts Again

These two Canadian stocks are paying higher dividends with growing earnings and long-term expansion plans.

Read more »

Canadian investor contemplating U.S. stocks with multiple doors to choose from.
Dividend Stocks

The Perfect TFSA Stock: A 5% Yield With Monthly Paycheques

A TFSA holding Choice Properties can create a tax-free monthly “second paycheque” with a yield near 5%, but tenant concentration…

Read more »

diversification and asset allocation are crucial investing concepts
Dividend Stocks

A 4.6% Dividend Stock That Pays Cash Monthly

Whitecap’s 4.6% monthly dividend looks tempting, but it only works if oil and gas cash flow holds up.

Read more »

The sun sets behind a power source
Dividend Stocks

Buy the Dip: 1 Utility Stock That Looks Like a Steal After Falling 21%

TransAlta’s 23% pullback looks tied to a share issuance, but long-term electricity demand and contracted growth are still building.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

How to Use Your TFSA to Bring in $49 a Month Starting With Only $15,000

Explore the benefits of a $15,000 TFSA and learn how to maximize your investment potential with smart strategies.

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

How to Build a Balanced TFSA Focused on Income and Capital Gains

This strategy can deliver decent returns while also reducing risk for investors.

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

How to Use Your TFSA to Average $2,650 Per Year in Tax-Free Passive Income

Are you wondering how you can generate over $2,500 of tax-free passive income? Use this TFSA model portfolio to hit…

Read more »

woman checks off all the boxes
Dividend Stocks

This TSX Dividend Stock Is Down 20% and Worth Holding for Decades

Nutrien’s 16% drop has pushed its yield above 1.8%, just as fertilizer demand stays essential for feeding the world.

Read more »