Pembina Pipelines Corp

I own this stock (TSX-PPL). This is a stock I have done very well with. I bought shares a couple of times in December of 2001 and have made a total return of 18% per year. The dividend portion of my return is 7.5% per year. That means that some 41% of my return is in dividends.

If you had invested in the company 5 or 10 years ago, you have probably have earned 24% or 17.6% per year, respectively. The dividend portion of this return would be 8% or 7.5% per year, respectively. The dividend portion of the return would probably have been around 34% or 42.5% per year, respectively.

This stock had some dividend increases prior to 2009, when it decided to change from an income trust to a corporation. In 2009 it stopped any dividend increase and promised that they would maintain the current dividend until 2013. This is because they had a tax pool, so they would probably not have to pay taxes until 2014 to 2015.

Because a lot of income trusts have decreased dividends, or not increased them for a number of years, I would not consider the growth in dividends on this company to be any indication of the future. The growth in dividends by the way for this company is 7.5% per year over the past 5 years and 4% per year over the past 10 years.

They have however, with their recent purchase of Provident Energy; announced that they will increase their current dividend by 3.8%. An article on their 4th quarter report and the purchase of Provident Energy is at the Winnipeg Free Press.

Of course the other problem with dividends from income trusts was that they based it on distributable income. When they changed to a corporation, we really need to start looking at dividend payments with the same perspective we use for other corporations. That is we need to look at Dividend Payout Ratios based on earnings and cash flow.

For this company the Dividend Payout Ratios are high. The 5 year median DPRs for earnings is 137% and for cash flow is 96%. DPRs for 2011 were 158% for earnings and 93% for cash flow. The DPRs for 2012 are expected to be 146% earnings and 86% for cash flow. As you can see, the DPRs for earnings are still much too high. However, the DPRs for cash flow are coming down nicely. One thing is that we do not know what the impact of Pembina buying Provident Energy will have on these ratios.

Some of the growth figures for this company are very good, like Revenues per Share which has grown at the rate of 30% and 16% per year over the past 5 and 10 years. Also, the growth in earnings is not bad, with the growth in EPS being 8.6% and 5.4% per year over the past 5 and 10 years. Growth in Cash Flow is also ok with the 5 and 10 year growth at 9% and 4.4% per year, respectively.

Where this company falls down is the growth in Book Value. It has none. For most income trusts the book values would decline over time. This is because they paid out dividends based on distributable income not earnings. This company was no exception. Book value has declined by 3% and 2.5% per year over the past 5 and 10 years.

Pipelines often have heavy debt loads. The Liquidity Ratio for this company has always been very low. The current ratio is just 0.34. When this ratio is lower 1 it means that the current assets cannot cover the current liability. Even adding back the current portion of the debt (which has been handled) the current ratio is still low at 0.91, but the company has a 5 year median value of 1.12.

The Asset/Liability Ratio is currently lower at 1.40 than usual. The 5 year median ratio is much better at 1.73. The current Leverage and Debt/Equity Ratios are currently higher than normal at 3.47 and 2.47 respectively. The 5 year median ratios are 2.33 and 1.33, respectively. The current ones are a bit high, but the 5 year median ones are pretty typical of such companies. Pembina has been in compliance with all debt covenants during the years ending December 31, 2011 and 2010.

The Return on Equity for the year ending 2011 was 17.2% and the 5 year median ROE is 15.8%. This is a good rate. Also, the ROE based on comprehensive income is fairly close at 16.1% at the end of 2011 and with a 5 year median 16%.

This pipeline company has been a very good investment for me. It has handled the change from an income trust quite well. I have several pipelines and they have all been solid investments.

Pembina transports crude oil and natural gas liquids produced in Western Canada. It owns and operates oil sands pipelines and has a growing presence in midstream and natural gas services sectors. Pembina holds a 50% interest in the Fort Saskatchewan Ethylene Storage Facility. Its web site is here Pembina. See my spreadsheet at ppl.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.