TSX BUY ALERT: 1 Absolute Bargain Stock Yielding Over 8%

If you can stomach the risks, this stock is an absolute bargain with a yield over 8%.

| More on:
Man making notes on graphs and charts

Image source: Getty Images.

The TSX market crash has created opportunities to buy bargain stocks with higher-than-average yields. The coronavirus crisis has led many dividend stocks to be priced for dividend reduction or cessation, whether it is fair or not. Particularly risky high-dividend yielders include companies exposed to oil and gas, travel/leisure, and discretionary retail.

The best companies in the worst sectors

In this time, entire sectors have been thrown in the trash without regard for individual companies. Sector discrimination can create bargains for shrewd investors who aren’t afraid of a little bit of risk.

If you are willing to do your research and go through the garbage, there are some high-quality, high-yielding stocks at a bargain prices. This exercise is not for the faint of heart. It is risky and volatile to buy into depressed sectors, yet, from time to time, you can find a solid gem that is a real steal.

This 8.8% yield is a steal

Pembina Pipeline (TSX:PPL)(NYSE:PBA) is one of those gems. It is an absolute bargain stock trading with a yield of 8.8% today! This stock is heavily exposed to the oil and gas sector in Canada. Over the years, Canada’s oil sector been absolutely slaughtered due to weak government management, lack of pipeline capacity, and a glut of oil supply. Yet, Pembina is a pipeline and midstream infrastructure company. In a normal investment environment, Pembina has been considered a very safe, stable investment.

Yet, when oil collapsed in March, Pembina stock crashed 70% alongside the Canadian oil producers. The stock is up about 40% since then, but it is still only half the value it was trading in February. Pembina is not an oil producer, so is the recent punishment justified? I would say yes and no, but mostly no.

Contracted, safe cash flow

85% of Pembina’s adjusted EBITDA is derived from long-term, fee-based contracts. 62% of these contracts have zero volume or pricing risk. Storage and pipeline capacity across Canada is limited and in great demand, so its customers need Pembina’s infrastructure to get their oil to market.

The market has priced significant producer default risk into Pembina stock. Certainly, many of its customers, even those considered oil and gas majors, are facing financial stress at today’s oil prices. Yet, 80% of Pembina’s counter-parties have investment grade credit backing their contractual obligations.

There is, of course, the risk that smaller counter-parties could default on contracts. Yet, with most of Pembina’s contracts set as take-or-pay or fee-for-service contracts, 2020 revenue and cash flow should remain relatively intact overall.

Shored-up balance sheet

Pembina was quick to respond to the COVID-19 crisis. It quickly shored up its balance sheet and reduced its 2020 capital-expenditure program by over 40% to $1.2 billion. It has a BBB credit rating by Standard & Poor’s (which it expects to maintain), $2.3 billion of cash and debt facilities, and an additional $3.3 billion revolving credit capacity. Its weighted average life of debt is 12.7 years and debt maturities are limited over the next two years.

The maintenance of its dividend is a key priority for the company. The dividend has almost no commodity price risk, since it is fully covered by its contracted fee-based cash flows. Pembina’s all-in payout ratio is 54%, which is very modest. During this period, you shouldn’t expect any dividend growth, but the dividend right here is well covered for 2020.

This stock is an absolute bargain

Pembina is a really, really good company that’s unfortunately in a really terrible sector. Its management is disciplined and conservative and ensured its balance sheet is in strong shape and its dividend is sufficiently funded for a long time. It appears OPEC+ has come to some sort of supply curtailment agreement over the Easter weekend, so that will bring some positive news for the Canadian oil sector.

This will also be positive for Pembina, as investor sentiment in the sector may begin to slowly return. If you believe there is hope for Canada’s oil and gas sector, then I suggest your best bet is with Pembina Pipeline. It selling with a juicy 8.8% yield, and that makes this stock a real bargain 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 Robin Brown owns shares of PEMBINA PIPELINE CORPORATION. The Motley Fool recommends PEMBINA PIPELINE CORPORATION.

More on Dividend Stocks

stock analysis
Dividend Stocks

Buy These TSX Dividend Shares Next Week

Are you looking for dividend stocks to add to your portfolio? Buy these picks next week!

Read more »

edit Safety First illustration
Dividend Stocks

3 of the Safest Dividend Stocks in Canada

These three dividend stocks are all high-quality companies with defensive operations, making them some of the safest investments in Canada.

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

3 Stocks to Anchor Your Portfolio in a Rocky Market

Three stocks are solid anchors in any portfolio today for their outperformance in a weak market and defiance of the…

Read more »

money cash dividends
Dividend Stocks

3 Solid Dividend Stocks That Cost Less Than $30

Given their solid financials and healthy cash flows, the following under-$30 dividend stocks are a good buy in this volatile…

Read more »

grow money, wealth build
Dividend Stocks

2 High-Yield Dividend Stocks With Rock-Solid Payout Ratios

These two dividend stocks offer unbelievably high yields of more than 7% and earn more than enough free cash flow…

Read more »

Dividend Stocks

5 Steps to Making $500 in Monthly Passive Income in 2023

Generating monthly passive income isn't as hard as it sounds. Here are 5 steps to start making $500 every month.

Read more »

sad concerned deep in thought
Dividend Stocks

Worried About a Recession? Invest in This Stable Dividend Stock to Rest Easy

Stable dividend stocks bought primarily for their payouts can offer you surety of returns, even during a recession.

Read more »

A golden egg in a nest
Dividend Stocks

How to Turn $50,000 Savings Into a Generous Nest Egg in 2 Decades

Build a generous nest egg in 20 years by investing your accumulated savings in Dividend Aristocrats and holding them in…

Read more »