Pat McKeough responds to many personal questions on specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.
This past week, one Inner Circle member asked about dividend stocks—specifically, about a pipeline firm that is one of Canada’s remaining income funds. The company has just made a major overseas acquisition and Pat assesses the potential risk and rewards.
Q: Pat: I’m looking at Inter Pipeline as a high-dividend pipeline stock for my portfolio. What do you think of it? Thank you.
A: Inter Pipeline Fund (symbol IPL.UN on Toronto; www.interpipelinefund.com), transports, stores, markets and processes oil and natural gas.
The fund has four divisions:
The oil sands division’s pipelines transport 35% of Canadian oil sands production.
The conventional business’s pipelines handle 15% of western Canadian conventional crude oil.
NGL Extraction converts 40% of Alberta’s exported natural gas into natural gas liquids, like ethane, propane and butane.
The storage division operates terminals in the U.K., Germany and Ireland under the Simon Storage banner, and in Denmark under the Inter Terminals brand.
In January 2012, the fund paid $505.9 million for four oil-storage terminals in Denmark. The purchase added 10.7 million barrels to Inter Pipeline’s petroleum capacity, bringing it to a total of 19 million barrels. Inter Pipeline is now the fourth-largest provider of storage services in Europe.
When to trust your dividends
“One of the best ways to judge whether a company will keep paying its dividend, or even increase it, is the dividend payout ratio. This simply measures what portion of a company’s earnings are allotted to paying dividends. If a company keeps its payout ratio fairly steady, say at 7% of earnings, and its earnings grow…”
Pat McKeough has spent years showing investors how to convert high-quality dividend stocks into accelerated earning power. He shows you how you can make work for you in this free report. Download it now.
Dividend stocks: Outlook rises and falls with oil and gas prices
Even with the contribution from the new terminals, Inter Pipeline’s revenue fell 1.9% in the three months ended March 31, 2012, to $297.2 million from $303.0 million a year earlier. That’s mainly due to a 15.8% drop in volumes at NGL Extraction. As well, some of the division’s contracts are based on natural gas prices, which are near historic lows right now. Still, cash flow per unit rose 5.1%, to $0.41 from $0.39.
Inter Pipeline’s outlook generally rises and falls with oil and gas prices. Lower prices prompt producers to cut back their output, which lowers the fund’s revenue, because there is less oil and gas for it to handle. Inter Pipeline’s concentration in Alberta also adds risk.
Starting with the December 2011 payment, Inter Pipeline raised its monthly cash payout by 9.4%, to $0.0875 per unit from $0.08. The new annual rate of $1.05 yields 5.3%.
Inter Pipeline is structured as a limited partnership rather than an income trust. However, like income trusts, Inter Pipeline is now subject to Ottawa’s trust tax, which took effect on January 1, 2011.
Still, the fund paid out 64.7% of its cash flow to unitholders in the latest quarter, so it has been able to maintain, and even raise, its payout. As well, because the payout is now a dividend, it’s eligible for the dividend tax credit if you hold your units outside an RRSP.
In the most recent Inner Circle Q&A, Pat looks at the considerable risks involved in integrating a major acquisition in a new country, and a new business. and whether those risks are offset by the Danish firm’s fixed long-term contracts. He concludes with his clear buy-hold-sell advice on Inter Pipeline Fund.
Many seniors were enraged when the Conservatives made their sudden change in income trust taxation in 2006. Were you one of them? Did you have to change your retirement investing plan as a result? In hindsight, do you think the change was justified? Let us know what you think in the comments section below. Click here.
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