The die is cast and the decision is irreversible. Income investors are upset by the news that one of the dividend all-stars is reducing its dividend by more than 70%. Inter Pipeline (TSX:IPL) is halting its 11-year dividend growth streak after announcing a dividend cut last March 30, 2020.
The COVID-19 pandemic and lower oil prices were cited by management as the reasons for the decision. Inter Pipeline’s dividend reinvestment plan (DRIP) will also be on hold. The previous payment of 14.25 cents per share is down to four cents, starting with the May 15, 2020 payment.
Beginning April 1, 2020, there will be a 20% and 10% cut in the salaries of the CEO and executive officers, respectively. The board of directors will receive 15% less of the regular cash retainer due to them.
Justification
The dividend cut by this energy infrastructure company came as a surprise. Inter Pipeline operates pipelines and other energy infrastructure assets in Western Canada and Europe. Every year, from 2009 to 2018, investors got so used to a dividend increase until the zero increase in year-end 2019.
However, the twin shocks of the coronavirus and plunging oil prices are too hot to handle. Inter Pipeline’s CEO and President Christian Bayle justify the action as prudent. The dividend cut will also mean annualized savings of up to $525 million.
Bayle, however, remains confident about the company’s operations. The CEO wants investors to know that the decision of the board members is not a reflection of the lack of confidence in Inter Pipeline’s core businesses. He said the current business environment is unique and very challenging.
Shelved plan
Apart from the dividend cut, other plans in the pipeline were shelved and moved to the back burner. Inter Pipeline’s plan to sell its European bulk liquid storage has been overturned even though the talks with potential buyers have reached the advanced stage.
The prospective acquirers from Europe are also dealing with the COVID-19 pandemic. Their businesses have been affected such that the sale process would be difficult to execute at present. Inter Pipeline’s bulk liquid storage business spans the U.K., Denmark, Germany, Ireland, Netherlands, and Sweden.
Inter Pipeline is open to revisiting the process when the environment is right. Only then can this $4.21 billion pipeline operator pursue and complete the transaction. The share price of Inter Pipeline is currently trading at $10.01, with a year-to-date loss of nearly 54%.
Hard luck club
Inter Pipeline isn’t the only stock in the energy sector cutting dividends. Although not dividend all-stars, Vermilion (82.61%), TORC (80%), Crescent Point (75%), and Whitecap (50%) are also implementing dividend cuts. Meanwhile, Cenovus (100%) is temporarily suspending dividend payments.
If the pace of coronavirus infections is accelerating, so too the pace of dividend cuts in the stock market. Inter Pipeline will no longer be a dividend all-star for understandable reasons.
The company assets are its financial bedrocks. It should be producing stable, fee-based cash flow in the long-term. But the call of the times is to be sensible, and practical on the financial aspect to be able to ride out the pandemic.
