A high dividend yield can indicate a dividend cut is possible, but this company’s payout looks safe due to secure cash flow from its long-term contracts.
A recent acquisition should also help diversify its operations, add to its earnings and cut its costs.
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PEMBINA PIPELINE CORP. (Toronto symbol PPL; www.pembina.com) operates pipelines that carry almost all of B.C.’s oil and half of Alberta’s conventional oil.
The company’s network also transports 30% of Western Canada’s natural gas liquids (NGLs), while its extensive facilities extract, process and store NGLs. Pembina also operates natural gas-processing plants.
Most of Pembina’s pipelines operate under fixed-price contracts. And while the company’s long-term dividend and cash flow outlook will ultimately depend on the severity and lifespan of the COVID-19 recession, we believe Pembina will survive. We also expect it will eventually recover to substantially higher prices.
Meantime, to conserve cash, the company is cutting its capital spending plans for this year by up to $1.1 billion due to the pandemic and the plunge in oil prices. Pembina has now budgeted between $1.2 billion and $1.4 billion. That’s compared with an earlier plan to spend $2.3 billion.
The company last increased its monthly dividend by 5.0% with the January 2020 payment, to $0.21 a share from $0.20. The new annual rate of $2.52 yields a high 8.2%.
In 2017, Pembina acquired Veresen Inc. for $9.7 billion. The purchase broadened its operations as well as its U.S. exposure. The new operations increased Pembina’s 2017 revenue by 30.1%, to $5.40 billion. Revenue jumped a further 36.1% in 2018, to $7.35 billion. In 2019, revenues fell 1.6% to $7.32 billion on lower NGL and oil prices.
Cash flow soared 154.0% from $878 million in 2015 to $2.23 billion in 2019. With more shares outstanding, cash flow per share rose at 72.3%, from $2.53 to $4.36.
Dividend Stocks: Major acquisition should add shareholder value
In December 2019, Pembina completed its acquisition of Kinder Morgan Canada. It owns crude oil storage and terminal businesses at Edmonton and Vancouver wharves, and a terminal in the Port of Vancouver that imports and exports grains, minerals and other bulk commodities.
In a separate transaction, the company acquired the U.S. portion of the Cochin pipeline from Kinder Morgan. That increased its stake in the pipeline to 100%. Cochin pumps natural gas liquids between Alberta and Chicago.
Pembina paid $4.25 billion for Kinder Morgan Canada. The deal included $2.0 billion in cash, $1.71 billion in Pembina common shares and $536 million in class A preferred shares.
The new operations strengthen investor value: they should add $350 million to Pembina’s expected 2020 earnings. The company also expects that contribution to increase by another $100 million annually over the next few years.
Lower oil prices hurt revenue in the second quarter of 2020 for Pembina’s marketing division. That offset the contributions of the new operations. However, cost savings increased cash flow by 6.5%, to $586 million from $550 million; per-share cash flow slipped 0.9% to $1.07 from $1.08, on more shares outstanding from the Kinder Morgan purchase.
I am a new subscriber who finds your Daily Advice columns to be very informative and useful for my investment needs. I recently fired my wealth advisor after 5 years of what I considered non performance. I don’t miss the monthly fees either. Right now all my money is sitting in cash while I wait for a downturn in the markets. I have a list compiled of the stocks I am interested in which includes a good number of your buy recommendations. I will continue to read your articles with the intent to eventually subscribe to a Premium subscription.
Regards
Ron Sherby
Winnipeg, mb
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I am a new subscriber who finds your Daily Advice columns to be very informative and useful for my investment needs. I recently fired my wealth advisor after 5 years of what I considered non performance. I don’t miss the monthly fees either. Right now all my money is sitting in cash while I wait for a downturn in the markets. I have a list compiled of the stocks I am interested in which includes a good number of your buy recommendations. I will continue to read your articles with the intent to eventually subscribe to a Premium subscription.
Regards
Ron Sherby
Winnipeg, mb
Thank you, Ron. We look forward to serving you, as a premium subscriber.