Inter Pipeline Ltd.: A Buy for the 6.9% Dividend Yield?

Inter Pipeline Ltd. (TSX:IPL) offers a growing payout and a shot at some nice upside.

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Income investors have a variety of high-yield dividend stocks to choose from these days, and the energy infrastructure sector in particular is offering up some interesting opportunities.

Let’s take a look at Inter Pipeline Ltd. (TSX:IPL) to see if it deserves to be in your portfolio right now.

Operations

Inter Pipeline operates oil sands pipelines, conventional oil pipelines, natural gas liquids (NGL) extraction assets, and a liquids storage business in Europe.

The company took advantage of the downturn to add strategic assets at attractive prices, including the $1.35 billion deal to buy two NGL extractive facilities from The Williams Companies. The purchase was done at a large discount to the cost of building the sites, and IPL is already seeing the benefits amid an improvement in market prices.

Results

Inter Pipeline reported a 3% increase in Q1 funds from operations (FFO) compared to the same period last year.

Net income hit a record $143 million, supported by a 20% increase in FFO to $99 million in the NGL processing segment. Throughput volumes on the pipelines also hit a record, averaging nearly 1.5 million barrels per day.

The European business was the only weak spot in the quarter, with FFO in the bulk liquid storage segment dropping to $18.7 million from $26.2 million in the same period last year.

Growth

IPL’s $3.5 billion Heartland Petrochemical Complex is now under construction and should be completed by the end of 2021. IPL says the facility should generate long-term average annual EBITDA of $450-500 million once it goes into commercial service.

Balance sheet

IPL has a stable balance sheet. Consolidated net debt to total capitalization was 52.5% at the end of Q1, and the company finished the quarter with $1.1 billion available on its $1.5 billion revolving credit facility.

Dividends

IPL raised its monthly dividend last fall from $0.135 to $0.14 per share. That’s good for a yield of 6.9%, at the time of writing.

The Q1 payout ratio was 63%, so the distribution should be safe.

Time to buy?

IPL’s stock is down amid the broad pullback in the energy infrastructure sector. The market is concerned rising interest rates could encourage investors to dump dividend stocks in favour of fixed-income alternatives. In addition, higher rates increase debt costs and can reduce cash flow available for distributions.

These are important points to consider, but the drop in IPL’s stock price from close to $28 per share in December to the current price of $24.50 might be overdone.

If you are looking for a high-yield income play, IPL looks attractive today.

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 Andrew Walker has no position in any stock mentioned.

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