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Income investors who don’t own at least one pipeline stock are missing out on a great source of cash flow.

All of Canada’s major pipeline companies are yielding 5.9 per cent or more at current prices. The dividends are well protected and are usually increased every year. There is little likelihood of a cut.

That’s not to say it can’t happen. Back in December, 1999, TransCanada Pipelines (now TC Energy Corp.) stunned the markets by announcing a surprise 28.6-per-cent cut in its payment, from $1.12 a year to 80 cents – this after repeated promises the dividend was safe. Angry investors sold, driving down the share price by almost 15 per cent in one day.

Conceivably, history could repeat but it’s unlikely. TransCanada’s reputation took a huge hit, and it took years for the stock to recover. Pipeline companies are now more protective of their payouts.

What they can’t protect is the share price. Rising interest rates have played a major role in knocking down the value of these stocks in the past 18 months. TC Energy shares are down 31 per cent since May, 2022. Enbridge has lost 20 per cent, while Pembina Pipeline has slipped about 13 per cent. I expect the share price of these companies will rebound as rates stabilize and that all will increase their dividends by around 5 per cent in 2024.

Here are updates on my Income Investor newsletter pipeline picks. Prices are as of the close of trading on Nov. 24.

TC Energy Inc.

  • Ticker: TRP-T
  • Type: Common stock
  • Current price: $50.60
  • Annual payout: $3.72
  • Yield: 7.4 per cent
  • Risk: Moderate

Comments: The shares have been drifting down for most of the year, in part because of rising interest rates and in part because of huge cost overruns on the Coastal GasLink project. However, we have seen some recovery recently.

TRP reported a loss for the third quarter of $197-million (negative 19 cents a share) compared with a profit last year of $841-million (84 cents a share). Year-to-date, net income was $1.4-billion ($1.33 a share), down from $2.1-billion ($2.11 a share) in 2022.

The good news is that the mechanical phase of the long-delayed and very expensive Coastal GasLink pipeline was finally completed ahead of its revised year-end schedule. TRP’s share of the cost was $5.4-billion.

TRP owns a 35-per-cent stake in the 670-kilometre pipeline, which it will operate. When it enters service next year, the pipeline will transport gas from the interior of B.C. to a new LNG terminal in Kitimat. There it will be liquefied and exported to global markets. This will be the first LNG export terminal in Canada. Based on the cost and the difficulties and delays in building it, there may never be another.

In another development, TRP successfully completed the sale of a 40-per-cent non-controlling equity interest in its Columbia Gas and Columbia Gulf pipeline systems to Global Infrastructure Partners (GIP) for $5.3-billion.

The company has announced plans to spin off its oil pipelines division as a separate company, but has yet to provide details.

Action now: Buy. With the construction burden of Coastal GasLink behind it, a divestiture program to clean up the balance sheet, and the likelihood interest rates will stabilize, 2024 should be a better year for this stock.

Enbridge Ltd.

  • Ticker: ENB-T
  • Type: Common stock
  • Current price: $46.57
  • Annual payout: $3.55
  • Yield: 7.6 per cent
  • Risk: Moderate

Comments: The shares were hit hard in September after the company announced it will purchase three U.S. gas distribution utilities. They touched a 52-week low of $42.75 in October but have recovered slightly since.

Enbridge reported a drop in third-quarter earnings attributable to shareholders. The company had a profit of $532-million (26 cents a share), compared with $1.3-billion (63 cents a share) in the same quarter of 2022. Enbridge said the drop was primarily due to non-operating factors, including the 2022 gain of $1.1-billion on the closing of a joint venture merger transaction with Phillips 66.

For the first nine months of the year, Enbridge said earnings were $4.1-billion ($2.02 a share), up from $3.7-billion ($1.80 a share) last year.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in the third quarter increased by $113-million compared with the same period in 2022.

Results for the first nine months of 2023 were in line with expectations, and Enbridge says it anticipates that its businesses will continue to experience strong capacity utilization and operating performance through the balance of the year, with normal course seasonality.

Action now: The yield is the highest of these three pipeline stocks, but investors have been nervous about the company’s high debt load for some time. The gas utilities purchase only fuels those concerns. The price-to-earnings ratio of 31.05 is high for a utility. If you own shares, keep them, but if you’re making new purchases choose TC Energy or Pembina for better total return potential.

Pembina Pipeline Corp.

  • Ticker: PPL-T
  • Type: Common stock
  • Current price: $45.01
  • Annual payout: $2.67
  • Yield: 5.9 per cent
  • Risk rating: Moderate

Comments: Third-quarter results were down from last year. Revenue was $2.3-billion, compared with $2.8-billion in the same period last year. For the first nine months of the 2023 fiscal year, revenue was $6.7-billion, a big drop from $8.9-billion in 2022.

Third-quarter earnings were $346-million (57 cents per diluted share), down from $1.8-billion ($3.23 a share) last year. The decrease was primarily due to the benefit in the prior year from a gain on the change in ownership of the majority of Pembina’s field-based gas processing assets.

For the nine months, earnings were $1.1-billion ($1.78 a share). Last year, Pembina earned $2.7-billion ($4.73 a share) in the same period.

On the positive side, third-quarter adjusted EBITDA was a record $1.021-billion, up 6 per cent from last year. The company raised its 2023 adjusted EBITDA guidance range to $3.75-billion to $3.85-billion (previously $3.55-billion to $3.75-billion).

In addition to paying a quarterly dividend of 66.75 cents a share, Pembina is also buying back stock. Over the nine months to the end of September, the company repurchased approximately 1.2 million shares at a total cost of $50-million.

Action now: Buy. The stock has the lowest yield of the three, but the share price held up much better as rates were rising. Pembina’s management and directors repeatedly assured investors the dividend would be protected during the darkest days of the pandemic, and they kept their word.

All three stocks would be good fits for an income portfolio. In terms of capital-gains potential, I would rate TC Energy as my top choice for 2024, followed by Pembina.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 01/03/24 4:00pm EST.

SymbolName% changeLast
ENB-T
Enbridge Inc
+1.16%47.19
PPL-T
Pembina Pipeline Corp
+0.55%47.49
TRP-T
TC Energy Corp
+0.45%53.92

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