If there’s one area of the market that investors have just simply gotten wrong, it’s the pipeline industry. While it’s true that energy companies have suffered amid a glut in the oil and gas market, when it comes to pipelines, these stocks have fallen for absolutely no good reason. And that includes a stock like Pembina Pipeline (TSX:PPL)(NYSE:PBA).
After about seven years of solid growth, the company fell back in December 2017, when the oil and gas glut began to take hold of the industry. Since then, Pembina has been climbing back to its former glory. That is, until the recent market crash.
The stock fell over 70% from peak to trough and, only in the last few weeks, has been making some headway. But again, this stock has fallen for absolutely no good reason. Let’s look at why.
It’s important to remember as an investor that although pipelines and energy are within the same industry, they might as well be entirely different industries in and of themselves. On the one hand, pure oil and gas companies are going through an incredibly difficult time.
First, there was the glut back in 2017 that still hasn’t resolved, and now there is the announcement from the Organization of the Petroleum Exporting Countries (OPEC) that Russia would not be pulling back its production of oil, and Saudi Arabia would, in fact, be increasing production. This sent oil and gas prices in Canada to an even further discount, as West Texas Intermediate fell more than 40% practically overnight.
But, as I say, pipelines like Pembina are entirely different. In fact, investors should be supporting Pembina in any way they can, as once pipelines are built, the crude glut could be all but over!
In Pembina’s case, the company has already completed its Peace pipeline expansion project, and it was so successful, it’s now looking to expand a phase six, seven, and eight. This will get crude oil out of Western Canada, where Pembina enjoys a strong presence.
Further to its bright future is Pembina’s commitment to increasing rewards as the company expands. Pembina has a history of rewarding investors as further cash comes in, and this is almost certainly going to be the case moving forward. In fact, the company has committed to a 8-10% increase in dividends through 2021, and analysts believe this should be easily achieved.
That comes from two areas. First, of course, is the company’s expansion projects. Pembina has $5.6 billion set aside for secured growth projects, so, upon completion, cash should come pouring in. But under all this is the company’s long-term contracts — contracts that will keep cash coming in for decades to come. That means both your stock and dividends are safe and secure.
It doesn’t get much better than Pembina. You have a cheap stock here that has an incredibly bright short- and long-term future. Even if you invested just to reach fair value, you’re looking at a potential upside of 24% as of writing.
Now, you can look at fair value, but analysts believe in the next year this stock should shoot past $60 per share. As we may have seen the market bottom already, that leaves little time to get in on this stock before the price shoots back up. That’s an upside of 125% as of writing.
On top of this is the company’s crazy dividend yield of 10.24% — a dividend that has increased an average of 8% every year over the last five years. This dividend is also one of the few that is handed out monthly, which is a nice way to reinvest on a regular basis.
So, let’s say you decided to invest $10,000 in Pembina today. That would mean you’re looking at potentially turning that into $22,568 in a year, with $604.24 in dividends. That’s not a bad takeaway during a crash.