Updated on June 16th, 2021 by Bob Ciura
Midstream energy companies are widely-known to be a source of high dividend yields. Midstream operators benefit from favorable economics because of the continued need for oil. In addition, midstream companies are less exposed to commodity price risk than their upstream peers in the exploration and production industry.
Pembina Pipeline Corporation (PBA) is a midstream energy stock that rewards its shareholders with high dividend income. This Canadian monthly dividend paying company currently has a 6% dividend yield, more than four times the average yield of the S&P 500 Index.
Pembina Pipeline is unique among midstream oil companies because it pays its dividend monthly.
Despite their appeal, monthly dividend stocks are quite rare. You can see our full list of all 53 monthly dividend stocks (with important metrics like dividend yields and payout ratios) by clicking on the link below:
Pembina Pipeline’s high dividend yield and monthly dividend payments make it an intriguing investment from an income perspective.
However, there is more to investing than picking a high yield, and this article will analyze the investment prospects of Pembina Pipeline in detail.
Pembina Pipeline Corporation is a Canadian pure-play energy infrastructure company based in Calgary, Alberta, Canada.
With a market capitalization in excess of $18 billion, Pembina is a large cap stock.
In early May, Pembina reported (5/6/21) financial results for the first quarter of 2021. Revenue increased 22% year-over-year, due mostly to 41% growth in product sales revenue. But due to its hedges at low prices, the positive effect from increased volumes and higher prices was offset by losses from hedging activities. As a result, its EBITDA and its earnings–per–share were flat compared with the same quarter last year.
Pembina owns an integrated system of pipelines that transport various hydrocarbon liquids and natural gas products, primarily in western Canada. The company also has gathering and processing facilities. Pembina operates three segments: Pipelines, Facilities, and Marketing & New Ventures.
While Pembina is still beholden to crude demand, it is better insulated than companies that sell oil directly. This insulation has helped it weather many storms before, and we believe it will come out the other side of the COVID-19 crisis as well.
According to the company, Pembina generated 94% of its 2020 adjusted EBITDA from fee-based activities. This means the vast majority of the company’s cash flow comes from services that are paid based on volumes of products transported and stored.
The company also operates under the “take-or-pay” model which further secures a certain level of cash flow, even during fluctuations in the underlying commodity price. This has helped Pembina generate positive cash flow and maintain its dividend over multiple difficult periods for the oil and gas industry in the past several years.
We expect Pembina will grow its earnings-per-share by 4% per year over the next five years. This growth will be fueled by new projects and with acquisitions.
On June 1st 2021, Pembina agreed to acquire Inter Pipeline for C$8.3 billion, in an all–stock deal. Pembina views the complementary nature of Inter Pipeline’s assets to be highly appealing.
Source: Investor Presentation
The acquisition will provide Pembina with instant growth, creating a company with over 6 million barrels per day of hydrocarbon transportation capacity, double the company’s current level.
The deal is financially attractive as well. Cost savings should mean the deal is highly accretive to Pembina. The two companies have highly connected and complementary assets and as a result they expect to achieve synergies of C$150 million to C$200 million per year. The combination will create one of the largest Canadian energy infrastructure companies.
Pembina’s current business is well-run and highly-profitable but it is also investing for the future. In all, we see Pembina’s growth outlook as promising.
Pembina currently pays a monthly dividend of C$0.21 per share, or C$2.52 per share annualized. In U.S. dollars, this works out to an annualized payout of approximately $2.06 per share at current exchange rates. This means Pembina stock currently yields 6.1%.
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 company has a solid track record when it comes to dividends, having maintained and grown the payout steadily since 1998.
The other appealing aspect of the Inter Pipeline acquisition is that Pembina expects to raise its monthly dividend by C$0.01 per share, representing a 4.8% increase, once the acquisition closes.
Importantly, the acquisition is not damaging Pembina’s financial position by saddling it with excessive debt. The company has a strict policy of financial guardrails, which include a strong credit rating and manageable debt.
Source: Investor Presentation
We see a long runway for dividend growth ahead as well given that the company should continue to grow its earnings and distributable cash flow. Once the Inter Pipeline acquisition is completed, Pembina expects the combined company will have a dividend payout ratio of 72%-77% based on fee-based distributable cash flow.
This has not only made the payout much safer, but has increased the runway the payout has to move higher over time. Pembina’s dividend is therefore highly-rated in terms of not only safety, but also its growth potential among pipeline operators.
This is a hugely attractive proposition for dividend investors and when one considers the payout is also monthly instead of quarterly, Pembina is in a class of its own.
Pembina is a high dividend stock with a long track record of steady dividends. It also has monthly dividend payments which are among the biggest reasons why investors might take an initial interest in the stock.
Looking more closely, Pembina appears to be well-positioned to grow over the mid-to-long term given its robust pipeline of projects on the horizon, even with deferred capex because of COVID-19.
Pembina’s 6% dividend yield is highly appealing for income investors, while the expected growth from the Inter Pipeline acquisition give a high probability of continued dividend growth. We see the safe and growing dividend as the principal reason to own Pembina today, and believe it is an attractive monthly dividend stock for income investors.