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What are we looking for?

Sustainable dividends from Canadian pipeline stocks poised to gain – whatever the outcome for the Trans Mountain expansion project.

The screen

Pipeline stocks have moved up this month. That’s in the wake of Kinder Morgan Canada’s announcement it would scrap its $7.4-billion Trans Mountain pipeline expansion if it was unable to reach agreements by May 31 to proceed.

Top pipelines will likely prosper whether the expansion goes ahead or not. That’s because Kinder Morgan Canada’s dilemma only serves to highlight the value of existing pipelines (most with long-term contracts) and the high barriers to entry – both financial and regulatory – facing new pipelines.

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From an admittedly small list of Canadian pipeline stocks, we singled out those offering both profit and dividend growth from their Canadian and international operations. We then applied our TSI Dividend Sustainability Rating System; it awards points to companies based on these key factors:

  • One point for five years of continuous dividend payments – two points for more than five;
  • Two points if it has raised the payment in the past five years;
  • One point for management’s commitment to dividends;
  • One point for operating in non-cyclical industries;
  • One point for limited exposure to foreign currency rates and freedom from political interference;
  • Two points for a strong balance sheet, including manageable debt and adequate cash;
  • Two points for a long-term record of positive earnings and cash flow sufficient to cover dividend payments;
  • One point if the company is a leader in its industry.

Companies with 10 to 12 points have the most secure dividends, or the highest sustainability. Those with seven to nine points have above-average sustainability; average sustainability, four to six points; and below average sustainability, one to three points.

More about TSI Network

TSI Network is the online home of The Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough. They include our award-winning flagship newsletter, The Successful Investor. The TSI Best ETFs for Canadian Investors is the latest. TSI Network is also affiliated with Successful Investor Wealth Management.

What we found

Our TSI Dividend Sustainability Rating System generated five pipeline stocks: TransCanada operates 96,800 kilometres of U.S. and Canadian pipelines. Enbridge’s own vast network also criss-crosses the Canada-U.S. border. Inter Pipeline concentrates on Western Canada and Europe, while Pembina Pipeline operates an 18,000-kilometre network winding its way across North America. Big power producer Canadian Utilities gets a big chunk of its profits from its 64,500 kilometres of pipelines in Alberta, Australia and Mexico.

Pipeline stocks poised to gain

Ranking*CompanyTickerDividend Sustainability RatingPointsDiv. Yield (%)Market Cap ($Bil)Recent Price ($)1Yr Total Return (%)
1Enbridge Inc.ENB-THighest116.470.541.80-25.9
2TransCanada Corp.TRP-THighest114.948.656.06-11.8
3Canadian Utilities Ltd.CU-THighest104.59.434.88-10.3
4Pembina Pipeline Corp.PPL-TAbove Average94.121.142.59-3.3
5Inter Pipeline Ltd.IPL-TAbove Average76.99.124.33-13.0

Source: Dividend Advisor

*Ranking is determined by TSI Dividend Sustainability Score. Where overall points are the same, analysts considered P/E, dividend yield and industry outlook to decide final placements.

We advise investors to do additional research on any investments we identify here.

Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.

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