Pembina Pipeline: Yield 6.5%, Yield Above Monthly Payer (NYSE: PBA)


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Looking to outperform high-dividend stocks in 2022? With the market down around -7% so far this year, the hunt is on for stocks that have avoided selling so far.

Pembina Pipeline Corporation (PBA) is one of those outperforming high yield stocks. It is up 4.7% so far in 2022, compared to 4% for midstream, -3.65% for the broader energy sector and -7.10% for the S&P 500 :

Pembina Pipeline Performance

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Profile:

PBA, based in Calgary, Canada, provides transportation and intermediary services for the energy industry.

It operates through three segments: Pipelines, Facilities and Marketing & New Ventures. PBA is a member of the Toronto Exchange 60 Index and has paid approximately $10.5 billion in dividends since inception. PBA was incorporated in 1954.

NOTE: Except for the price/share, all dollar amounts are in Canadian currency, unless otherwise indicated.

PBA’s assets are located primarily in Western Canada, where it has 3.1 million barrels/day of transportation capacity and 6.1 billion cubic feet/day of gas processing capacity, in addition to other significant assets, including 354 million barrels/day of fractionation capacity, 32 million barrels/day of storage capacity, and 25 million barrels/day of export capacity.

Pembina Pipeline Assets

PBA website

PBA’s west coast location gives PBA an access advantage over many other midstream companies – it has a much shorter 20-day round trip to Asia, a major demand hub. Given that much of the growth in energy demand in the coming years will likely occur in Asia, this suggests that PBA should be in a good position to capitalize on this growth going forward.

Earnings:

PBA has three main revenue segments: pipelines, which generated 57% of third quarter 2021 adjusted EBITDA; facilities, which contributed 31%; and Marketing & New Ventures, with 12%:

Benefits of the Pembina Pipeline

PBA website

Conventional pipeline volumes were up year-over-year, and sequentially in Q3 21, while transmission pipeline volumes were down and oil sands pipeline volumes were flat.

Gas Services volumes in Q3 21 were stable compared to Q3 20 and Q2 21; and NGL Services’ are down compared to Q3 ’20 and Q2 ’21

Pembina Pipeline Volumes

PBA website

Like most energy companies, PBA had a tough 2020, with revenue, net income and adjusted operating cash flow declining due to the demand destruction caused by the pandemic.

However, like many high dividend income vehicles covered in our articles, 2021 has seen a turnaround for PBA, with revenue up 42%, net income up 29%, adjusted operating cash flow /share up 13% and adjusted EBITDA up slightly. .

Distributions were flat at C$0.21, while the 13% gain in adjusted operating cash flow per share improved PBA’s distribution coverage factor from 1.62X to 1.84:

Pembina Pipeline Breakdown

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Growth projects:

Management has commissioned three major projects in 2020 – 2021 and plans two more expansion projects to be commissioned in 2022 – 2023:

Pembina Pipeline Growth Projects

PBA website

Distribution :

At its 01/21/22 intraday price of $30.95, the PBA returned 6.49%, with a payout ratio of 55.26%. The PBA pays monthly, ex-dividend the last week of each month and paying in the middle of the following month. It becomes ex-dividend on 01/24/22, so the next available monthly ex-dividend date is end of February

It has an average five-year dividend growth rate of around 7%. Management last increased the monthly distribution from C$0.20 to C$0.21 in December 2019.

Dividend in PBA shares

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Taxes:

PBA issues 1099-DIV to US investors at tax time – not a K-1. There is a 15% withholding tax for US citizens, which can be offset by claiming a credit for foreign tax paid on US tax returns.

“Pembina expects that its dividends paid to U.S. individual investors will be considered “qualified dividends,” as determined for U.S. federal tax purposes, eligible for reduced tax rates, provided certain holding and other requirements are met. Pembina does not expect any portion of its dividends to be a non-taxable return of capital. Dividends paid by Pembina will be reported to shareholders via Form 1099-DIV. (PBA Site)

Estimates:

With a market capitalization of $17 billion, PBA is a very large player in the midstream industry. It looks the most undervalued on a price/pound basis, 1.17X against a median average of 5.1X. It also looks undervalued for EV/EBITDA and price/sales, with a dividend yield that’s roughly in line with median averages.

Valuation of PBA shares

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Profitability and leverage:

Although still negative, due to a large impairment charge in Q4 2020, PBA’s ROA and ROE both improved in Q3 21 and are expected to turn positive in Q4 21. EBITDA coverage /interest rebounded, but remained much stronger than the median averages.

Its debt-to-equity leverage of 0.72X is well below the median average of 2.87X.

Pembina Pipeline PCR

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Debt and liquidity:

The long-term credit rating assigned by S&P Global Ratings (“S&P”) to Pembina is “BBB”. S&P has also assigned a debt rating of “BBB” to Pembina’s senior unsecured medium term notes, a debt rating of “BB+” to the Series 1 subordinated notes and a rating of “P-3 (high) » for each series issued. Class A Preferred Shares of Pembina, other than Class A Preferred Shares, Series 2021-A. S&P affirmed Pembina’s credit rating during the second quarter of 2021.

As of 9/30/21, 10% of PBA’s debt and construction commitments are expected to mature within the next year, with approximately 14% maturing over 1-3 and 3-5 year periods. :

Pembina Pipeline Debt

PBA website

The PBA was in compliance with its covenants of 0.7X with a healthy margin, with ratios around 0.41X as of 9/30/21.

Pembina Pipeline Debt Covenants

PBA website

While Adjusted EBITDA only increased by 2% in Q1-3 21, PBA’s interest expense decreased by -5%, which improved its interest coverage from 7.3%, to 7 ,18X:

Pembina Pipeline Interest Coverage

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Analyst price targets:

Analysts have raised their price targets for PBA slightly since September 21, with the low target rising by 8.5%, the high target by around 1% and the mid target by 4.35%.

At $30.95, the PBA is 5.5% below its lower price target, 19% below the higher target of $38.36, and 13.5% below the average price target of $35.77.

Pembina Pipeline stock price targets

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All charts by Hidden Dividend Stocks Plus, except where noted.

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