Tuesday, January 17, 2012

Inter Pipeline Fund

I do not own this stock (TSX-IPL.UN). It is not that this is not fine company, but I already have enough in pipelines. The current dividend yield is good at 5.68% but not as good as the 5 year median dividend yield of 9%. However, this is to be expected since the rules changed for income trust companies.

However, this company intends to remain structured as a limited partnership. As a limited partnership, Inter Pipeline also retains the ability to treat a portion of our annual distributions to unitholders as a tax-deferred return of capital. Here is some information on Limited Partnerships at about.com. Tax reporting can be a bit tricky, so know what you are getting into. IPL has lots of information on this at their web site.

The growth in dividends for the last 5 and 10 years at 3.7% and 3.5% per year, respectively is good considering the high dividend yield and that inflation (according to the Canadian Government was running around 2% per year over the past 5 and 10 years). Also, there was no dividend increases in 2008 and 2009. The most recent dividend increase for 2012 was 9.4%.

The Dividend Payout Ratios are high, with 5 year median ratios at 97% and 66% for earnings and cash flow, respectively. The DPR for cash flow is expected to come down a bit this year to around 63% in 2011, but the DPR for earnings is not expected to retreat at all. The above is probably why the book value is losing ground with it declining by 1.5% and 3.7% over the past 5 and 10 years.

Total returns for the stock over the past 5 and 10 years have been very good with 5 and 10 year returns at 23% and 18.5% per year, respectively. The portion of this return attributable to dividends was 7.4% and 7.7%, respectively. However, expect a lower portion of total return from this stock in the future, as dividend yields are coming down.

The growth in revenue over the past 5 years is not good, but it is over the past 10 years. Growth in revenue per share over the past 5 years is a negative 5% per year. Growth over the past 10 years is 13% per year. Growth in earnings and cash flow are both good.

Recently, the return on equity has been good. The ROE for the end of the 2010 financial year was 17.6%, but the 5 year median at 11.9% was still good, but lower. The ROE for the 12 months ending in September 2011 is good at 18.6%. The ROE on comprehensive income is also good with the one for 2010 at 15.5% and with a 4 year median rate of 13%.

The Liquidity Ratio for this company has often been quite low. Part of this is because it includes a current of the long term debt. The company does have debt facilities in place to handle debt. The Liquidity Ratio given is 0.10. You need a ratio of at least 1.00 for current assets to cover current liabilities. However, if you include the cash flow in the calculation, the ratio is 1.30.

The Asset/Liability Ratio has lately been low also, with a current value of 1.42 and a 5 year median ratio of also 1.42. (I would prefer both Liquidity Ratio and A/L Ratio to be at least 1.50.) The Leverage and Debt/Equity Ratios currently at 3.40 and 2.40 are not unusual for this sort of company.

The Insider Trading report shows no insider trading over the past year. However, insiders are given deferred Unit rights not options. Few insiders actually own any Class A Units (sold on TSX, Limited Liability Units) or Class B Units (Unlimited Liability Units.) Most insiders have Deferred Unit Rights. Institutions hold around 12% of the outstanding units. Over the past 3 months were has been some buying and selling and they have reduced the units they hold by 3.5%.

The 5 year median low and high Price/Earnings Ratios are 9.98 and 16.74. The current P/E ratio of 19 is therefore rather high. I get a current Graham Price of $10.90 and the current stock price of $18.49 is some 70% higher. The 10 year median high difference between the Graham Price and stock price is 22%. By this measure, stock price is high.

The Price/Book Value Ratio is going to be relatively high because the book value has been decreasing. However, it is also absolutely high at 3.40. The current dividend yield is also relatively low as the dividend yield has been decreasing.

The analysts’ recommendations on this stock are Strong Buy, Buy and Hold. The consensus recommendation is a Hold. The 12 month stock price for a couple of Hold recommendations is $18, which is slightly below the current price. A number of analysts say they like the company and that it is well managed. However, they also say buy on weakness, or buy at or below $16.50 to $17.00.

There is a recent G&M article from a technical analyses view.

As I have said, I will not be buying this as I have enough pipeline companies in my portfolio.

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 an income trust. Its web site is here Inter Pipeline. See my spreadsheet at IPL.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.

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