Pembina Pipeline: A Beaten-Down Buy

12/02/2020 5:00 am EST

Focus: ENERGY

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

In these days of historically low interest rates, how does a stock that yields over 7% sound to you? What’s the catch? The company in the beaten-down energy sector, asserts Gordon Pape, editor of The Income Investor.

Pembina Pipeline Corp. (PBA) 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 $0.21 a share ($2.52 a year). In addition, 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 Limited, 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 continues 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%.

Management said the company’s commitment to its dividend can be “evidenced by examining its history.” The high yield suggests that 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. The stock is a "Buy" for investors who can deal with high risk.

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