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Is Inter Pipeline’s Dividend Safe?

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Inter Pipeline Ltd (TSX:IPL) has already cut its dividend once this year. Once a high-yielding payout that was paying $0.1425 every month, shareholders are now receiving payments of just $0.04. But with the oil and gas company facing pressure from low oil prices and the COVID-19 pandemic, a dividend cut seemed inevitable.

Now that months have passed since its dividend cut, it could be a good time to re-assess the company’s payouts. Let’s have a look at whether the current dividend payments are safe, or if Inter Pipeline may need to trim its payouts yet again.

Future profits could be stronger than expected

It won’t be until August that Inter Pipeline releases its next round of quarterly results. Once they’re out, investors will get a better picture of how much of an impact COVID-19’s having on the oil and gas company. But there are a couple of reasons to expect that things will be better for Inter Pipeline and that they won’t be as bad as the company feared they would be just a few months ago.

The first is that oil prices have recovered since the March market crash. The price of West Texas Intermediate (WTI) was back up over US$40/barrel last week. Prior to March, oil prices were fairly stable and above US$50/barrel. When the markets crashed, so did the price of oil. And that was around the time the company announced a dividend cut.

The second reason is that for many cities in North America, businesses are opening back up and governments are lifting restrictions. There could still be a fair bit of people on the roads and driving during the summer months, pushing the demand for oil up and boosting the commodity price.

It could lead to some better quarterly results for Inter Pipeline and other oil and gas companies this year, making the company’s current dividend that much safer.

No reason to worry as of now

Currently, Inter Pipeline is paying $0.48 per share in dividends annually, and its per-share earnings of $1.27 have plenty of room to support that level of payout. There isn’t a reason for investors to be concerned about the payout right now, especially with oil prices rallying in recent weeks.

However, investors saw how quickly things changed in March when the markets fell over a cliff. If that were to happen again and if were a spike in COVID-19 cases, then all bets are off on not only for Inter Pipeline’s dividend, but also the markets overall.

Should investors buy Inter Pipeline for its dividend?

Currently, Inter Pipeline’s paying investors a dividend yield of around 4% per year. It’s a decent payout and monthly installments do sweeten the deal. However, given the risk involved, especially with oil and gas stocks, investors are better off looking for more stable income stocks to buy.

Now’s not a great time to be adding volatile, high-risk oil and gas stocks into your portfolio. Until there’s some stability in the economy, investors should stay far away from the oil and gas industry.

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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 David Jagielski has no position in any of the stocks mentioned. 

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