Tuesday, May 11, 2010

Pembina Pipelines Inc Fund 2

I would like to continue to talk about this company (TSX-PIF.UN), which I first bought in December 2001. My total return on this company is 15.9% per year. The yield on this stock, like all unit trust companies, is quite high. The current yield is 8.7%. My yield is even higher at about 15.8%. This is because I bought this stock when it was still raising its dividend. The company has said that they plan to pay the same dividend until 2013.

The first discouraging thing about this company is the amount of Insider Selling. Over the past year, there has been Insider Selling to the tune of $2.6M. There has been some Insider Buying, but only about $.5M. Of course, you never know why people are selling. A bright spot is that insiders have more stock than options. The other bright spot, of course, is the plan to retain current dividend until 2013.

Last year, because of the Dividend Reinvestment Plan (DRIP), the number of trust units outstanding increased by about 8%. The company has now suspended the DRIP plan as it says it no longer needs to sell units to fund currently planned capital expenditures and because it now has a strong balance sheet.

When I look at the P/E, the 5 year average low is 14.8 and the 5 year average high is 20. I get a current P/E of 17 on a price of $18.36. When I look at the Graham Price, I get one for 2010 of $13.27. This is some 38% below the current stock price. This is very close to the 10 year average different between the Graham Price and the Stock price. Both the above P/E and the Graham Price are based on earnings estimates for 2010.

When I look at the Price/Book Value Ratio, I find that the current P/B Ratio at 2.53 is some 25% above the 10 year average of 2.02. What you want to see is a current ratio below the 10 year average and that would point at a good current stock price. The last item to look at is the yield. The current year at 8.7% is below the 5 year average of 9.3%. What you usually want is a current yield higher than the 5 year average. However, 8.7% yield is a very good yield. I do not think that any of the above point to a current good stock price.

When I go to look at what the analysts’ recommendations are, I find that they cover all types from Strong Buy, Buy, Hold, Underperform and Sell. By far the most recommendations are in the Hold category, so the consensus recommendation would be a Hold. It would seem that the Underperform and Sell recommendations come with a stock price to be achieved within the next 12 months that is below the current price. That is, they feel the stock is overpriced.

Because I am a long term investor, I do not sell a stock just because it is overpriced. I tend to stick with good stock and not buy and sell a lot. The market has a tendency to over and under price stocks all the time. One good thing I see with analysts comments is that no one seem to feel the dividend is going to be cut. Why some analysts seem to feel this is a good buy is because of the high dividend yield. You can collect a great dividend in the meantime as you wait for this stock, and the market in general, to recover.

As I said yesterday, I feel that I have a solid investment in this stock and I will continue to hold what I have. I will not be buying more because I have enough in my portfolio. I never let any one stock get too large a proportion of portfolio.

This is the biggest Pipeline Income Fund in Canada. It is a utility. It is engaged in the transportation of light conventional and synthetic crude oil, condensate and natural gas liquids in Western Canada. Its web site is here Pembina. See my spreadsheet at pif.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

1 comment:

  1. I just stumbled on your excellent investment blog and website. I enjoy reading you intelligent investment blog, and thank you very much for sharing. I am a novice and beginner when it comes to stock investment. I am trying to learn a thing or two and educate myself a bit before I invest with my small saved money. You talk quite often about Graham Price in your blog. I just wonder if you can explain what it means and show a sample Graham Price calculation in your blog by taking actual stock data of your choice. I remember you mentioned somewhere in your blog that you use net earnings and book value to compute Graham Price. What kind of earnings do you use in the Graham Price i.e. net forward eps, ttm net eps, last year's net eps, avg net eps over x years or some other combination? Also, do you use regular book value (i.e. with Intangibles) or tangible book value (i.e. without Intangibles)? Do you use average book value over x years to calculate Graham Price? Thank you.