Better Midstream Stock: Pembina Pipeline vs Keyera?

Rising energy demand is setting up midstream stocks for good times, with generous dividends for shareholders.

Karen Thomas, MSc, CFA

Karen is a stock market enthusiast focused on uncovering those stocks that she believes the market has mispriced. She does this through fundamental and quantitative analysis of companies and their industries, as well as a study of future opportunities and trends. She holds a Masters degree in Finance, the CFA designation, and has over 20 years of experience in the investment management industry. Having worked at a major pension fund, as well as two leading mutual fund firms as an analyst and portfolio manager, she has solid investing expertise which she aims to share with her readers.

Published January 17, 2025 7:00 pm EST

Are you looking for safe and sustainable dividend income? Midstream stocks are famous for providing investors with strong dividend yields, as well as steady growth. They have the advantage of long-term, stable cash flows and economic resiliency.

In this article, I’ll compare and contrast two midstream stocks, Pembina Pipeline Corp. (TSX: PPL) and Keyera Corp. (TSX: KEY).

oil and gas pipeline — Image source: Getty Images

Dividend yields

Let’s start at the place that we’re all probably most interested in – dividends.

Keyera currently has a dividend yield of 5%. This dividend has a strong history of growth and is backed by stable and growing cash flows. Since 2008, the company’s dividend has grown at a compounded annual growth rate (CAGR) of 6%. This was backed by an 8% CAGR in Keyera’s distributable cash flow during the same period.

As for Pembina, its dividend yield is also generous, currently standing at 5.2%. Since 2008, PPL’s dividend has grown at a CAGR of 3.4%. This is backed by strong cash flows, a large portion of which is comprised of long-term, fee-based contracts.

This is the nature of midstream stocks – strong, steady cash flows and dividends. So now that we’ve taken a look at dividends, let’s move on to the businesses.

The businesses

Keyera is one of the largest natural gas downstream businesses in Canada, with an extensive footprint in the natural gas liquids business. Western Canada has one of the largest hydrocarbon resources in the world. It’s also very cost-competitive. This translates into strong demand for its resources and strong volumes for Keyera.

Keyera is well-positioned as one of two fully integrated natural gas liquids (ngl) infrastructure players. Growing gas production means higher NGL production, which is good for Keyera. In fact, the company is expecting 6% growth in NGL volumes annually over the next few years. Keyera’s business generates strong returns and looks forward to healthy growth driven by strong demand.

Pembina Pipeline owns pipelines primarily in Western Canada. It also owns gas gathering and processing facilities, and oil and NGL infrastructure and logistics businesses. The company enjoys a diversified and highly contracted business with 70% take-or-pay contracts. These are contracts that guarantee a buyer will take an agreed upon amount of a commodity on a certain date or pay the seller a penalty if it doesn’t.

Valuation

Lastly, let’s take a look at valuation for these two midstream stocks. Keyera trades at 18 times this year’s expected earnings, while Pembina trades at 17 times this year’s expected earnings.

In my opinion, Keyera deserves to be trading at a premium valuation relative to Pembina. This is because the company generates a higher return on equity, as well as record margins and earnings before interest, taxes, and depreciation.

The bottom line

All midstream stocks are benefitting from growing gas and NGL production in Western Canada. In my view, Keyera is the better one to buy today. The company is looking forward to growth, as well as stable fee-for-service cash flows, to support its dividend. Since 2003, Keyera has returned $4.8 billion to shareholders.