Monthly Dividend Stock In Focus: Pembina Pipeline

Up to date on June sixteenth, 2021 by Bob Ciura

Midstream vitality firms are widely-known to be a supply of excessive dividend yields. Midstream operators profit from favorable economics due to the continued want for oil. As well as, midstream firms are much less uncovered to commodity value threat than their upstream friends within the exploration and manufacturing business.

Pembina Pipeline Company (PBA) is a midstream vitality inventory that rewards its shareholders with excessive dividend revenue. This Canadian firm at the moment has a 6% dividend yield, greater than 4 occasions the typical yield of the S&P 500 Index.

Pembina Pipeline is exclusive amongst midstream oil firms as a result of it pays its dividend month-to-month.

Regardless of their attraction, month-to-month dividend shares are fairly uncommon. You may see our full checklist of all 53 month-to-month dividend shares (with vital metrics like dividend yields and payout ratios) by clicking on the hyperlink under:

Pembina Pipeline’s excessive dividend yield and month-to-month dividend funds make it an intriguing funding from an revenue perspective.

Nevertheless, there may be extra to investing than choosing a excessive yield, and this text will analyze the funding prospects of Pembina Pipeline intimately.

Enterprise Overview

Pembina Pipeline Company is a Canadian pure-play vitality infrastructure firm based mostly in Calgary, Alberta, Canada.

With a market capitalization in extra of $18 billion, Pembina is a big cap inventory.

In early Could, Pembina reported (5/6/21) monetary outcomes for the first quarter of 2021. Income elevated 22% year-over-year, due principally to 41% progress in product gross sales income. However due to its hedges at low costs, the constructive impact from elevated volumes and better costs was offset by losses from hedging actions. Because of this, its EBITDA and its earnings–per–share have been flat in contrast with the identical quarter final yr.

Pembina owns an built-in system of pipelines that transport varied hydrocarbon liquids and pure fuel merchandise, primarily in western Canada. The corporate additionally has gathering and processing amenities. Pembina operates three segments: Pipelines, Amenities, and Advertising and marketing & New Ventures.

Whereas Pembina continues to be beholden to crude demand, it’s higher insulated than firms that promote oil immediately. This insulation has helped it climate many storms earlier than, and we consider it would come out the opposite aspect of the COVID-19 disaster as properly.

In accordance with the corporate, Pembina generated 94% of its 2020 adjusted EBITDA from fee-based actions. This implies the overwhelming majority of the corporate’s money movement comes from providers which might be paid based mostly on volumes of merchandise transported and saved.

The corporate additionally operates beneath the “take-or-pay” mannequin which additional secures a sure degree of money movement, even throughout fluctuations within the underlying commodity value. This has helped Pembina generate constructive money movement and preserve its dividend over a number of troublesome intervals for the oil and fuel business prior to now a number of years.

Progress Prospects

We count on Pembina will develop its earnings-per-share by 4% per yr over the subsequent 5 years. This progress might be fueled by new tasks and with acquisitions.

On June 1st 2021, Pembina agreed to amass Inter Pipeline for C$8.3 billion, in an all–inventory deal. Pembina views the complementary nature of Inter Pipeline’s belongings to be extremely interesting.

Supply: Investor Presentation

The acquisition will present Pembina with prompt progress, creating an organization with over 6 million barrels per day of hydrocarbon transportation capability, double the corporate’s present degree.

The deal is financially engaging as properly. Value financial savings ought to imply the deal is very accretive to Pembina. The 2 firms have extremely linked and complementary belongings and consequently they count on to realize synergies of C$150 million to C$200 million per yr. The mixture will create one of many largest Canadian vitality infrastructure firms.

Pembina’s present enterprise is well-run and highly-profitable however additionally it is investing for the long run. In all, we see Pembina’s progress outlook as promising.

Dividend Evaluation

Pembina at the moment pays a month-to-month dividend of C$0.21 per share, or C$2.52 per share annualized. In U.S. {dollars}, this works out to an annualized payout of roughly $2.06 per share at present change charges. This implies Pembina inventory at the moment yields 6.1%.

Word: As a Canadian inventory, a 15% dividend tax might be imposed on US buyers investing within the firm exterior of a retirement account. See our information on Canadian taxes for US buyers right here.

The corporate has a strong monitor file relating to dividends, having maintained and grown the payout steadily since 1998.

The opposite interesting side of the Inter Pipeline acquisition is that Pembina expects to lift its month-to-month dividend by C$0.01 per share, representing a 4.8% enhance, as soon as the acquisition closes.

Importantly, the acquisition shouldn’t be damaging Pembina’s monetary place by saddling it with extreme debt. The corporate has a strict coverage of monetary guardrails, which embody a powerful credit standing and manageable debt.

Supply: Investor Presentation

We see an extended runway for dividend progress forward as properly on condition that the corporate ought to proceed to develop its earnings and distributable money movement. As soon as the Inter Pipeline acquisition is accomplished, Pembina expects the mixed firm may have a dividend payout ratio of 72%-77% based mostly on fee-based distributable money movement.

This has not solely made the payout a lot safer, however has elevated the runway the payout has to maneuver larger over time. Pembina’s dividend is due to this fact highly-rated by way of not solely security, but in addition its progress potential amongst pipeline operators.

This can be a massively engaging proposition for dividend buyers and when one considers the payout can also be month-to-month as an alternative of quarterly, Pembina is in a category of its personal.

Ultimate Ideas

Pembina is a excessive dividend inventory with an extended monitor file of regular dividends. It additionally has month-to-month dividend funds that are among the many largest the explanation why buyers would possibly take an preliminary curiosity within the inventory.

Trying extra carefully, Pembina seems to be well-positioned to develop over the mid-to-long time period given its strong pipeline of tasks on the horizon, even with deferred capex due to COVID-19.

Pembina’s 6% dividend yield is very interesting for revenue buyers, whereas the anticipated progress from the Inter Pipeline acquisition give a excessive likelihood of continued dividend progress. We see the secure and rising dividend because the principal cause to personal Pembina in the present day, and consider it’s a beautiful month-to-month dividend inventory for revenue buyers.