Updated on August 11th, 2021 by Bob Ciura
The energy industry is well-known for housing exceptional dividend stocks. However, when we think of dividend energy stocks, the heavyweights like Exxon Mobil (XOM) and Chevron (CVX) typically come to mind.
Smaller energy companies can be a good source of dividend income as well. Inter Pipeline (IPPLF) is one example of this. Inter Pipeline has a market-beating 2.4% yield, and Inter Pipeline is a Canadian company that pays its dividend monthly.
Although monthly dividend payments are preferred by many investors, they are quite rare.
With this in mind, we created a full list of monthly dividend stocks, which you can access (along with relevant metrics like dividend yields and payout ratios) by clicking on the link below:
Inter Pipeline’s solid dividend yield and monthly dividend payments are two big reasons why the company may appeal to to dividend growth investors with a larger appetite for risk.
Inter Pipeline is an energy infrastructure corporation that is engaged in the transportation, storage, and processing of energy products in Western Canada and Europe.
Inter Pipeline is headquartered in Calgary, Alberta, Canada and has a market capitalization of approximately $7 billion. The company is undergoing a transformation of its business model. Previously, Inter Pipeline had been divided into four distinct segments for reporting purposes:
- Oil Sands Transportation
- NGL Processing
- Conventional Oil Pipelines
- Bulk Liquid Storage
Inter Pipeline is reclassifying its business segments as follows:
Source: Investor Presentation
As mentioned, Inter Pipeline operates in two geographies: Western Canada and Europe. In Canada, Inter Pipeline owns assets in two provinces: Alberta and western Saskatchewan.
In Europe, Inter Pipeline’s operations can be found in Ireland, England, Netherlands, Germany, Denmark, and Sweden. The vast majority of Inter Pipeline’s business is in its home country of Canada, where much of the company’s growth will come from in future years.
The company has been an acquisition target for two major peers in the energy sector, Pembina Pipeline (PBA) and Brookfield Infrastructure Partners (BIP). It appears BIP has won the bidding process, as Inter Pipeline indicated its support for BIP’s C$8.6 billion hostile takeover offer.
As this is a tender offer and Inter Pipeline remains a standalone company, we continue to maintain coverage on the company.
Inter Pipeline’s long-term strategy is to acquire and develop high-quality assets that generate stable and predictable cash flow, while delivering strong returns to shareholders. In recent years, Inter Pipeline has struggled as energy prices have fallen.
Funds from operations (FFO) had climbed steadily between 2010 and 2018, but fell significantly in 2019 due to weak energy prices, and again in 2020 due to the coronavirus pandemic. As a result, FFO-per-share declined 34% from 2018-2020.
For context, FFO per share grew by 8.3% from 2009 through 2018 and 9.7% from 2014 through 2018. This shows how exposed Inter Pipeline is to the rise and fall of energy prices.
The company has seen a notable recovery to start 2021. In the second quarter, adjusted EBITDA increased 2.2% year-over-year, while FFO increased 12% to $206 million. FFO-per-share increased 12% in the second quarter, and has increased 13% in the first half of 2021.
There is one area that could help Inter Pipeline see an improvement in its business. Inter Pipeline is currently developing Canada’s first integrated propane dehydrogenation (PDH) and polypropylene (PP) complex, which will add a fifth segment to the business.
Polypropylene is a high-value and easy to transport plastic used in manufacturing a wide range of finished products, including consumer packaging, automobile parts, medical equipment, currency and textiles.
Inter Pipeline’s key growth project, Heartland Petrochemical Complex (“HPC”) project, is set to complete by the end of 2021 and start generating cash flow in early 2022. The company noted that currently, HPC has ~60% of production capacity that is held under high–quality, long–term take–or–pay contracts. The objective is to increase it to ~70%.
Overall, we expect 5% annual FFO-per-share growth over the next five years.
Competitive Advantages & Recession Performance
Inter Pipeline’s main competitive advantage comes from the strength of its business model. The company typically buys assets and sells their use to credit-worthy counter-party under long-term, inflation-adjusted, commodity-insulated contracts.
Most of Inter Pipeline’s contracts are with highly creditworthy counter-parties, with more than 80% of the company’s revenues being derived from investment-grade counter-parties.
We would expect Inter Pipeline to perform decently well during a recession because of its low-risk business model, particularly relative to the broader energy sector.
Inter Pipeline’s FFO/share declined by about ~50% during the last recession, although much of this was a retracement after a significant run-up starting in 2007. The company recovered its previous level of profitability shortly thereafter.
Inter Pipeline cut its dividend by 72% in March 2020 due to the ongoing pandemic. While the dividend cut significantly reduced income for investors, the payout is much more sustainable at the present level. Based on expected FFO-per-share of $1.52 for 2021, Inter Pipeline has a projected dividend payout ratio of 26% for the full year.
Investors can compare the company’s current dividend yield to its long-term historical average dividend yield. Inter Pipeline currently pays a monthly dividend of $0.04 per share, or $0.48 per share annualized. This works out to approximately $0.38 per share annually in U.S. dollars. With a recent share price of ~$15.93, Inter Pipeline stock yields 2.4%.
This is a significant decline from before the dividend reduction, when Inter Pipeline had been paying $0.1425 per share monthly in U.S. dollars. The stock had a 10-year average dividend yield above 5%.
Note: As a Canadian stock, a 15% dividend tax will be imposed on US investors investing in the company outside of a retirement account. See our guide on Canadian taxes for US investors here.
The coronavirus pandemic was an unforeseen challenge that had a devastating impact on the energy industry. Inter Pipeline’s dividend payments were more than covered by its FFO between 2010 and 2019. But this completely changed in 2020.
All said, Inter Pipeline’s dividend appears safe right now and for the foreseeable future following the dividend cut.
Inter Pipeline has a number of characteristics that help it stand out to dividend investors, including a 2.4% dividend yield and monthly dividend payments. Further due diligence reveals that this company appears to have some growth prospects working in its favor, but faces headwinds from the decline in energy prices.
With the investments in the petrochemical complex, Inter Pipeline’s fifth business segment should add significantly to EBITDA.
Income investors looking for high dividend yields in the energy sector, may overlook Inter Pipeline. But the company has a solid yield along with a sustainable dividend.