In these days of historically low interest rates, how does a stock that yields 7.4 per cent sound to you?
Or how about one with a yield of 8.2 per cent?
You can buy either or both right now. Both have investment-grade ratings from two bond rating agencies. Both insist the dividend is secure and will not be cut.
What’s the catch? The two companies are in the beaten-down energy sector. Neither is involved in exploration and production of oil and gas, but they provide services to the battered industry. That makes them high risk in the eyes of many investors.
Are they worth a shot, in light of their attractive yields? Yes, if you are willing to accept the risk that comes with them. Here are the details.
Pembina Pipeline Corp. (PPL-T)
- Current price: $33.12
- Annual payout: $2.52
- Yield: 7.4 per cent
- Risk rating: High
Pembina owns and operates an integrated system of pipelines that transport various products derived from natural gas and hydrocarbon liquids produced primarily in Western Canada. The company also owns and operates gas gathering and processing facilities and an oil and natural gas liquids infrastructure and logistics business.
Pembina’s revenue and profits have taken a hit this year, but unlike many companies in the energy sector, it has not cut its dividend. On the contrary, the company has repeatedly stressed its commitment to maintain the monthly payout at a lofty 21 cents a share ($2.52 a year). That works out to a yield of 7.4 per cent at the current price.
Third-quarter results showed revenue of just under $1.6-billion, down from $1.7-billion in the same period of 2019. Earnings were $318-million (51 cents a share, fully diluted), down from $370-million (66 cents) the year before.
Adjusted EBITDA was $796-million, up 8 per cent from $736-million on the third quarter of 2019. New acquisitions acquired from Kinder Morgan were important contributors to the improvement.
The company expects adjusted EBITDA for the year to be within the original guidance range set in the fourth quarter of 2019, albeit near the lower end of that range. Based on the current outlook for the rest of the year, the company has narrowed its guidance range and expects to generate adjusted EBITDA of $3.25-billion to $3.3-billion in 2020. (EBITDA stands for earnings before interest, taxes, depreciation and amortization.)
The balance sheet appears to be in good shape, something that cannot be said for many energy companies. During the second quarter, Pembina’s credit ratings were affirmed at BBB (investment grade) by both Standard & Poor’s and DBRS Ltd., with the outlook or trend maintained as stable.
As for the dividend, the company said last spring that its dividend is more than covered by fee-based cash flows, meaning the company is not reliant on the portion of its business with direct commodity price exposure to pay the current dividend.
In its third-quarter report, the company continued to express confidence. During the first nine months of the year, Pembina’s ratio of common share dividends to adjusted cash flow from operating activities was approximately 60 per cent. Management said the company’s commitment to its dividend can be “evidenced by examining its history.”
The high yield suggests investors are still skeptical that the company will be able to sustain the dividend through 2021 if the economic environment does not improve. But Pembina’s repeated strong insistence that the dividend is secure means events would have to take a disastrous turn for it to reverse course now.
Keyera Corp. (KEY-T)
- Current price: $22.41
- Annual payout: $1.92
- Yield: 8.2 per cent
- Risk rating: Higher risk
Keyera is primarily in the natural gas and natural gas liquids business, providing such services as gathering, processing, fractionation, storage, transportation and marketing. It does not do any exploration or production.
Like Pembina, Keyera has not cut its dividend and insists it has no plans to do so. In its third-quarter report, the company said its strong balance sheet and low (54 per cent) payout ratio will allow it to continue to fund its growth capital projects without issuing new equity and to maintain its current monthly dividend of 16 cents a share or $1.92 annually.
At that rate, the stock is yielding 8.2 per cent. As with Pembina, this suggests a high degree of investor skepticism, but the company is adamant that the payout is sustainable.
Third-quarter results saw a 78-per-cent drop in net earnings, from $154.4-million (72 cents a share) in 2019 to $33.4-million (15 cents) this year.
Distributable cash flow fared better, coming in at $174.9-million (79 cents a share) compared with $183.8-million (85 cents) in 2019. Year-to-date, distributable cash flow was $586-million ($2.66 a share), an improvement from $435-million ($2.04) in the first nine months of 2019.
Adjusted EBITDA for the first nine months of the year was $705-million compared with $683-million last year.
“We continue to maintain our strong financial position, a priority that has remained consistent throughout the history of our company,” the company said in a message to shareholders.
“We have a strong balance sheet at Sept. 30, with a net debt to adjusted EBITDA ratio of 2.4 times, two investment grade credit ratings, access to $1.4-billion on our credit facility, and minimal long-term debt obligations in the next five years. In today’s uncertain markets, our financial strength and liquidity enhance our capacity to navigate challenges, while providing flexibility to be opportunistic.”
So, both companies seem determined to maintain their dividends. Still, I would be cautious. Don’t buy unless you can deal with risk. Talk to your financial adviser before taking action.
Full disclosure: The author owns shares in Pembina.
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Gordon Pape