Thursday, December 23, 2010

Inter Pipeline Fund

This is a stock (TSX- IPL.UN) that I follow, but I do not own. I last reviewed this in March of 2009. This company is a limited partnership and they do not plan to convert to a corporation. However, they will become a taxable entity after January 2011. Their distributions will also become dividends and they will qualify for the dividend tax credit.

The company has started to increase their dividends in the later part of 2009, after they remained flat for a few years. However, I feel that are paying a high portion of their cash flow in distributions. The payout ratio is expected to be around 70% over 2010 and 2011. However, this is less than the 5 year average of 74%. The increase in distributions over the past 5 and 10 years has been around the long term rate of inflation. Long term inflation is around 3% and the 5 and 10 year distribution growth has been at 3% and 2.8% per year, respectively.

If you inveted in this stock, a high proportion of your return will be in distributions. Over the past 5 years, the stock price has only grown around 2 to 3%, but the total return is around 11%. Over the past 10 years, the stock has grown much better, but you still had a high rate of total return from distributions. That is 10 to 11% of your total return was from distributions.

Most of the growth figures for this company are good. The only one that is not is the growth in book value. The 5 and 10 year growth figures are -3% per year and -4% per year, respectively. The problem is that the book value took a big hit in 2007 when the company loss money and it has been recovering, but very, very slowly.

Mostly the 5 year growth rates are not as good as the 10 year growth rates. This is to be expected because of the recent recession from which we have not fully recovered. For example, the growth in earnings for the last 5 and 10 years is at 5% and 20% per year, respectively. The growth in revenues for the last 5 and 10 years is 6% and 13% per year, respectively.

The liquidity ratio for this company is low at 0.39. This means that the current assets cannot cover their current liabilities. However, the reason for this is the current portion of their long term debt. They do have credit facilities in place to handle this. Their 5 year average Liquidity Ratio is 0.91. Their Asset/Liability ratio is much better at 1.43, with a 5 year average of 1.69. I would like to see the A/L Ratio at 1.50, but it is not unusual for pipelines to have a lot of debt. The Leverage Ratio (Assets/Book Value) is a bit high at 2.84, but not unreasonable so.

The Return on Equity for this stock is quite good, with a 5 year average of 9.5% and 11.9% for the financial year ending in December 2009. The ROE for this first 9 months of 2010 is even better at 17.5%. The Accrual Ratio is quite low as it is under 1%. The other good thing is that the Operating Cash Flow is much higher than the earnings.

Tomorrow I will look at what the analysts are saying about this stock and what my spreadsheet is saying about the current stock price.

Inter Pipeline is a major petroleum transportation, natural gas liquids extraction, and bulk liquid storage business based in Calgary, Alberta, Canada. Structured as a publicly traded limited partnership, Inter Pipeline owns and operates energy infrastructure assets in western Canada, the United Kingdom, Germany and Ireland. The company is a limited partnership, not a income trust. Its web site is here Inter Pipeline. See my spreadsheet at ipl.htm.

I had a bit extra money after doing my annual RRSP withdrawal. With this money, I bought some more Canadian Tire stock. This is a stock I already own and it is at a reasonable price.

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.


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