Seeking to boost income and growth? Look no further than Pembina Pipeline (TSX:PPL)(NYSE:PBA), which aside from paying a regularly growing dividend yielding almost 5%, is attractively valued allowing investors to play higher oil while avoiding the risks associated with smaller upstream oil producers.
Solid growth prospects
Pembina provides critical energy infrastructure including pipelines, processing and storage facilities to Canada’s energy patch, which is suffering from a considerable shortage of those assets.
It is those capacity constraints that have been weighing on Canadian benchmark oil and natural gas prices as well as forcing the government of Alberta to introduction mandatory oil production cuts at the end of 2018.
This not only bolsters Pembina’s defensive characteristics, but also its ability to grow earnings because of existing demand for new assets that are currently under development and brought online.
It also minimizes the impact of weaker oil and natural gas prices on Pembina’s earnings because demand for the utilization of its assets will remain strong for the foreseeable.
Pembina reported some solid second quarter 2019 results, confirming why it should be a core holding in every portfolio. Net revenue soared by 13% year over year to $758 million, gross profit surged 23% to $629 million and earnings almost tripled to $1.23 per share.
Pembina reported those robust results despite capital expenditures increasing by 70% year over year and transportation volumes remaining flat. That can be attributed to a reduction in the effective tax rate in Alberta, higher transportation and other fees, reduced costs and the contribution of new assets placed into service.
Adjusted EBITDA for 2019 is forecast to be $5.60 to $6 per share, which at the upper range represents a 7% increase over 2018.
That solid growth will be supported by a range of initiatives including $5.5 billion of secured projects under development, which Pembina anticipates will enter service by mid-2023.
Pembina’s earnings are highly contracted with 86% of its forecast 2019 adjusted EBITDA expected to come from take or pay and fee for service contracts. This enhances its defensive characteristics, helping to further protect earnings growth and the sustainability of Pembina’s dividend.
In fact, the midstream giant has hiked its dividend for the last seven years straight, giving it a juicy sustainable yield of just under 5%. Pembina announced a 5.2% dividend hike in May of this year and intends to grow it at a compound annual growth rate (CAGR) of around 4.5%, which is certainly achievable when the company’s growth prospects are considered.
This makes it an ideal stock for investors seeking to access the power of compounding and build wealth faster.
Had $10,000 been invested in Pembina 10 years ago and all dividends reinvested, the balance would now be $55,647 equating to an annualized return of almost 19%. If those dividends were taken as cash, then the original investment would only have grown to $43,602, representing an annual rate of return of just under 16%.
This emphasizes just how powerful compounding is as a tool to accelerate wealth creation. When coupled with Pembina’s regular dividend increases, it can generate an incredible rate of return of over 18%, well in excess of those offered by traditional income producing assets like bonds and guaranteed investment certificates (GICs).
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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 Matt Smith has no position in any of the stocks mentioned. Pembina is a recommendation of Dividend Investor Canada.