Back in the fall of 2009, I recommended the shares of Inter Pipeline (IPL-T) to readers of my Income Investor newsletter. At the time it was an income trust, trading at $9.99 and yielding 8.4 per cent.
At the time, we knew that income trusts were on their way out, due to a decision by Ottawa to tax them as corporations starting in 2011. The expected result was that most trusts would convert to corporate status, cutting their payouts in the process. However, Inter Pipeline had announced that it planned to maintain its distribution even after conversion. Given its 8.4-per-cent yield and stable business that made it look like a slam-dunk.
It turned out well. Not only did the company maintain its monthly payments but it actually has increased them half a dozen times in the intervening years.
Predictably, given the growing demand for yield, the share price soared, reaching a high of $38.85 in mid-September of 2014. But, like virtually all energy-related companies, Inter Pipeline's share price has since dropped sharply. As of the close of trading on Oct. 9 it was down to $26.49, a decline of more than 30 per cent from the high. I'd like to think we're near the bottom, but the market has a tendency to over-correct in situations like this so there still could be some downside left.
The good news is the share price decline has pushed the yield back up to 5.5 per cent, which is a handsome return. It had been as low as 3.3 per cent when the shares were at their peak a year ago.
The question now is whether the current monthly dividend of 12.25 cents per share is safe. Based on the second-quarter results, it appears to be. The company generated record funds from operations (FFO) of $181-million (54 cents per share), an improvement of 38 per cent over the same period in 2014. Oil sands output accounted for most of the business, with a value of $135-million. Dividends in the quarter totalled $123-million (36.75 cents per share) for a payout ratio of 71.9 per cent, down from 81.5 per cent a year ago. Pipeline throughput volumes were up slightly over last year.
For the first six months of the fiscal year, FFO was $357.5-million ($1.07 per share) compared to $263.3-million ($0.84 per share) in the first half of 2014. The company reported net income of $196.6-million, up 12.4 per cent from $174.9 million last year.
The company continues to expand its operations despite the slump in the energy sector. In July, it completed a $112-million expansion of its Mid-Saskatchewan pipeline system, adding 95,000 barrels per day of light crude oil capacity. The expansion, which is now fully in service, is supported by a number of contracts that are expected to generate approximately $25- to $30-million in incremental annual EBITDA.
A month before, the company completed capacity expansion work on the Polaris Pipeline system for the second phase of the Kearl oil sands project operated by Imperial Oil Resources Ventures Limited. The $45-million project is expected to generate an incremental $19 million in annual EBITDA under a 25-year cost-of-service transportation agreement.
This all adds up to a company that appears to be financially sound and is expending its business. Prudence suggests we may not see a dividend increase this fall (the last one in November 2014 was a 14 per cent hike). But even without that, the payout looks attractive and safe.
At this level, I think the shares are good value. Ask your financial adviser if they are appropriate for your account.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.
Gordon Pape