37% OFF: Buy Pembina Pipeline Stock Right Now for an 8.8% Dividend Yield

Shares of Pembina Pipeline offer good value. Meanwhile, its dividend yield is attractive.

| More on:
pipe metal texture inside

Image source: Getty Images

The coronavirus led to one of the sharpest downturns in energy demand, weighing heavily on the stock prices of the companies operating in the sector. While energy producers took most of the heat, energy infrastructure companies weren’t spared either. 

Take Pembina Pipeline (TSX:PPL)(NYSE:PBA), for example. The leading North American energy infrastructure giant registered a 42% decline in its earnings for the first six months of 2020. Pembina blamed lower margins on crude oil and NGL (natural gas liquids) sales and a slump in marketed NGL volumes amid a lower pricing environment for the decline. Nevertheless, the acquisition of Kinder and increased supply volumes at the Redwater Complex drove the overall volumes higher.

Despite the improvement in volumes, Pembina Pipeline shares are still down about 37% year to date, as an uncertain energy outlook and weakness in oil prices continue to remain a drag. However, I believe Pembina Pipeline has all the right ingredients that should keep it afloat amid challenges. 

Further, as the massive selloff in Pembina Pipeline stock eroded significant value, it’s time to invest in it to gain big from the recovery rally in the medium to long term. Though challenges prevail, a considerable discount of about 37% and a high dividend yield of over 8.8% make it an attractive bet at the current levels.

The bull case

Investors should note that Pembina Pipeline runs a low-risk business, which is supported by long-term, fee-based contracts and includes take-or-pay or cost-of-service arrangements with no volume or price risk. Further, the company has diversified its exposure to different commodities, including NGL, crude and condensate, and natural gas.

Pembina Pipeline expects businesses with fee-based contracts to contribute about 90-95% to its adjusted EBITDA in 2020. Moreover, Pembina expects to maintain the ratio to about 80%. The highly contracted nature of its business suggests that the company could continue to generate stellar cash flows that will drive its growth and support the dividend payouts. 

Pembina Pipeline pays dividends through its fee-based cash flows and has managed to reduce its standard payout ratio to 60% in 2020 from 72% in 2015. With strong fee-based cash flows and a sustainable payout ratio, Pembina Pipeline’s dividends are pretty safe.

Investors should note that Pembina Pipeline’s annual dividends have grown by 6.5% over the last five years. Besides, it paid about $4.5 billion in dividends. While the company is unlikely to announce any dividend hike in 2020, its resilient fee-based cash flows indicate that investors could continue to benefit from its high dividend yield amid lower rates. 

Shares of Pembina Pipeline also look attractive on the valuation front. Pembina stock is trading at the next 12-month EV-to-EBITDA multiple of 9.1, which is about 20% lower than its historical average. Also, its valuation looks favourable when compared to Enbridge’s forward EV-to-EBITDA multiple of 11.3.

Final thoughts

The uncertain near-term outlook could continue to limit the upside in Pembina Pipeline stock. However, the outlook for all forms of energy remains favourable in the medium to long term, which could support the recovery rally in Pembina Pipeline stock.

Pembina’s low-risk business, an attractive dividend yield of over 8.8%, and valuation make it a top recovery play for outsized gains. 

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 Sneha Nahata has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends PEMBINA PIPELINE CORPORATION.

More on Dividend Stocks

Specialty Brands faces higher raw materials costs.
Dividend Stocks

What’s Next for Premium Brands Stock?

Shares of the specialty food production and distribution company have fallen about 25% since last October.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Dividend Stocks

2 Interesting Buys in Any Market

Here are two intriguing buys in any market climate that offer defensive appeal as well as growth and income earning…

Read more »

Dividend Stocks

TFSA Investors: 3 TSX Stocks for Tax-Free Passive Income

These Canadian corporations have strong visibility over future earnings and dividend payouts.

Read more »

Simple life style relaxation with Asian working business woman healthy lifestyle take it easy resting in comfort hotel or home living room having free time with peace of mind and self health balance
Dividend Stocks

Lazy Landlords: 3 Cheap Canadian REITs to Buy in May 2022

You can become a passive landlord today by investing in Canadian REITs. Here are three cheap REITs to consider this…

Read more »

Target. Stand out from the crowd
Dividend Stocks

4 High-Yield TSX Stocks to Buy Ahead of Their Ex-Dividend Dates

If you have some cash lying idle, consider these high-yielding TSX stocks.

Read more »

growing plant shoots on stacked coins
Dividend Stocks

Passive Income: 3 TSX Stocks With Rapidly Growing Dividends

Worried about inflation? Here are three passive-income stocks to buy that pay rapidly growing dividends.

Read more »

Family relationship with bond and care
Dividend Stocks

Retirees: 4 Safe Stocks to Buy for Decent Passive Income

Retirees can offset the impact of runaway inflation by buying safe dividend stocks to create more cash flows.

Read more »

Canadian energy stocks are rising with oil prices
Dividend Stocks

3 Canadian Energy Stocks to Buy for Reliable Passive Income

Canadian energy stocks are gushing cash. Here's three top stocks that are perfect buys for reliable passive income.

Read more »