When one thinks of the best pipelines among Canadian dividend stocks, investors tend to look at Enbridge (TSX:ENB) and TC Energy (TSX:TRP). True, they are certainly among the most notable and reliable income stocks on the TSX Index. However, let’s throw another name into the mix – Pembina Pipeline (TSX:PPL).
Pembina has a market cap north of $16B and is one of the largest mid-stream companies on the TSX Index. Over the past year, the company has unperformed its peers and has lost approximately 30% of its value. This is in stark contrast to the company’s strong history.
It is the second best performing pipeline over the past handful of years and with returns of 65%, it is tops among all TSX listed pipelines over the past decade.
The question, is the recent underperformance an opportunity?
Strong Financial position
First, let’s take a look at Pembina’s financial position, which is among the best. It has a current ratio of 0.71 and a quick ratio of 0.54 – both of which are second only to Keyera (TSX:KEY).
Market Cap: $19.42 billion
Forward P/E: 14.91
Dividend Growth Streak: 9 years
Payout Ratio (Earnings): 156.52%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 5.00%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only
As they operate in a high capital industry, pipelines tend to carry high debt loads. Although this is normal, there could come a point where the debt load could become an issue. One need only look at Inter Pipeline’s (TSX:IPL) recent struggles with their flagship project, Heartland, to see how this kind of thing can impact cash flows and subsequently, the all important dividend.
In Pembina’s case, the debt load is quite manageable. It has a long-term debt to equity ratio of only 68 and a total debt to equity (D/E) ratio of only 70.44. Worth noting, these are best in class and Pembina is the only TSX-listed pipeline with a D/E below 100.
We’ve talked about Inter Pipeline's Heartland issues, and increased costs ultimately set the company back. Executing big projects on time and on budget is of the utmost importance in the industry.
So how has Pembina done?
Once again, Pembina comes out looking really good.
The company has an impeccable track record of execution. Pembina has a backlog of $11B worth of capital projects in the works and expects to place $1.1B of that into service by the first half of 2023. This will enable the company to continue growing cash flows for years to come.
Cash flows that will support the dividend. Pembina is a Canadian Dividend Aristocrat and Canadian Dividend All Star, owning a a nine-year dividend growth streak. Over that period, Pembina has raised the dividend by mid-to-high single digits and there is no reason not to expect similar growth moving forward.
The company has respectable payout ratios against adjusted cash flow from operations and fee-based distributable cash flow of 60% and 72% respectively. Worth noting, 95% and 72% of adjusted EBITDA stems from fee-based and take-or-pay contracts.
Pembina aims to payout out less than 100% of fee-based distributable cash flow and in 2021, that guidance is forecasting a ratio of around 71-75%.
Also worth noting, the company’s current cash flows are sufficient to cover the dividend, capital projects, and share repurchases. That’s right, Pembina’s capital investment program is fully funded by cash flows. All things considered, Pembina is likely to extend its dividend growth streak to a decade in 2021.
If investors are looking for a reliable income stock with consistent and reliable capital appreciation, Pembina is certainly worth another look. It has a proven track record of execution, a dividend that is well covered and a capital program that will provide consistent growth.