The Motley Fool

Why Inter Pipeline (TSX:IPL) Stock Has More to Run

Inter Pipeline (TSX:IPL) was previously depressed at below $20 per share. However, the stock got bid up surprisingly quickly from about $20 per share in June to $25 today for awesome price appreciation of 25% in merely three months. That’s a huge return compared to the average Canadian stock market return of roughly 7% per year.

There were two reasons for IPL stock’s run-up: the stock was too cheap and its yield was too high previously.

Gas pipelines

Inter Pipeline was too cheaply priced

Previously, at $20 per share, IPL stock traded at less than eight times cash flow, whereas it normally trades at closer to 11 times. This implied close to a discount of 30%.

The stock didn’t fall for no reason, though. After all, like many other energy-related businesses, Inter Pipeline has been operating in a more challenging oil and gas environment.

Despite that Inter Pipeline’s total NGL processing volume increased 13% in the first half of the year versus the comparable period in the prior year, its funds from operations (FFO) fell 12% due in part to lower frac-spread pricing in the NGL processing business. Additionally, its pipeline volumes declined 5%. After accounting for dilution from an increased share count, FFO per share fell 18% year over year.

Furthermore, Inter Pipeline has most of its investment dollars tied up in the Heartland Petrochemical Complex project. Since the project makes up about 95% of its secured projects and is not expected to come online until 2021, FFO is expected to stay roughly flat until then.

Inter Pipeline’s dividend yield was very attractive

Previously at $20 per share, Inter Pipeline offered a succulent yield of about 8.5%. That is at the high end of its 10-year yield range!

IPL Dividend Yield (TTM) Chart

IPL Dividend Yield (TTM) data by YCharts.

The high yield was thanks to a low valuation and also 10 years of dividend growth.

Inter Pipeline stock has more to run

What’s amazing is that Inter Pipeline could be worth so much more. Last week, Hong Kong billionaire Li Ka-Shing’s CK Infrastructure Holdings (currently, his son, Li Tzar Kuoi, is the chairman) offered to buy out Inter Pipeline for about $30 per share — more than 19% higher than Friday’s market close price of $25 and change. That said, it was reported that Inter Pipeline has rejected the offer.

Is IPL stock still a good buy now?

To be honest, the margin of safety, when IPL stock traded at the $20 level, is gone. That said, if you’re looking for income, you might buy the stock for a yield of 6.8%, which is still attractive. Longer term, the stock has good total returns potential of about 11% per year, especially if it completes the Heartland project on budget and on time.

5 TSX Stocks for Building Wealth After 50

BRAND NEW! For a limited time, The Motley Fool Canada is giving away an urgent new investment report outlining our 5 favourite stocks for investors over 50.

So if you’re looking to get your finances on track and you’re in or near retirement – we’ve got you covered!

You’re invited. Simply click the link below to discover all 5 shares we’re expressly recommending for INVESTORS 50 and OVER. To scoop up your FREE copy, simply click the link below right now. But you will want to hurry – this free report is available for a brief time only.

Click Here For Your Free Report!

Fool contributor Kay Ng has no position in any of the stocks mentioned.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.