Investors looking for the opportunity to generate a regularly recurring passive-income stream should look no further than midstream and energy infrastructure giant Pembina Pipeline (TSX:PPL)(NYSE:PBA). The midstream services company has hiked its dividend for the last seven years straight to yield a juicy 5%. That payment is not only sustainable, despite sharply weaker oil and fears of a global economic slowdown, but will continue to grow for the foreseeable future, making Pembina a highly appealing investment for retirees and other income-hungry investors.
The energy infrastructure provider is ranked as a leading provider of midstream services, including oil and natural gas transportation to Canada’s energy patch. It has a long history of growing earnings, despite the significant headwinds facing upstream oil and gas producers since prices collapsed in late 2014.
First-quarter 2019 EBITDA surged by 12% year over year to $773 million, while gross profit was 4% higher at $588 million. That came on the back of a 4% increase in the volume of hydrocarbons transported, processed and stored by Pembina’s facilities.
A combination of growing oil and gas production as well as existing pipeline infrastructure failing to meet prevailing demand means that volumes transported will continue to grow as Pembina expands its network. The company has $5.5 billion of secured projects under development, which are expected to come online between the second half of 2019 and mid-2023. They will significantly increase the transportation, storage, and processing capacity of Pembina’s infrastructure.
The inelastic demand for energy coupled with Pembina’s facilities forming a crucial link between the energy patch and key energy markets means that earnings can only continue to grow as petroleum production expands.
Pembina has forecast that its 2019 adjusted EBITDA could rise by as much as 7.5% year over year to just over $3 billion. When this earnings growth is considered in conjunction with the current dividend only amounting to 49% of operating cash flow and 40% of adjusted trailing 12-month EBITDA, it is highly that there are further dividend hikes ahead.
In fact, Pembina hiked its dividend by 5.3% in early May 2019, and that payment has expanded at a compound annual growth rate of around 4.5% since 2011.
Pembina is also working on future proofing its earnings growth. It has embarked on the Jordan Cove LNG project located in Oregon, submitting a draft environmental impact statement for the development in March 2019. The proposed facility will help to alleviate existing transportation bottlenecks and provide greater access to Asian energy markets, which is expected to be responsible for around 65% of global demand growth for gas.
The contracted nature of Pembina’s earnings, its wide economic moat and the fact that the company operates in an oligopolistic industry, which has steep barriers to entry, protects the company earnings from competition and economic slumps. Those characteristics endow it with solid defensive attributes, while virtually guaranteeing earnings growth when the economy is expanding because of greater demand for oil and gas.
Pembina is the ideal stock for investors seeking to generate a steadily growing dependable passive-income stream. It is also one of the best ways to build wealth. If an investor had purchased $10,000 of Pembina stock in June 2009, held it for 10 years, and reinvested all the dividends paid, they would have more than doubled their money to just over $24,000, earning an annual average rate of return of around 11%.
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Fool contributor Matt Smith has no position in any of the stocks mentioned. Pembina is a recommendation of Dividend Investor Canada.