Thursday, June 20, 2013

Inter Pipeline Fund

I do not own this stock Inter Pipeline Fund (TSX-IPL, OTC- IPPLF). A friend had asked me about this pipeline and I had no information on it, so I investigated it. It is a utility and I follow and have lots of utility stocks. Because I follow too many stocks to do two blogs entries per stock, I have to have only one entry on some. This would include this stock this year.

Since this stock was an income trust, it pays dividends each month. The dividend rate is good, with a current dividend yield of 4.92%. There is dividend growth and it has been running at 4.6% and 4.4% per year over the past 5 and 10 years. The last dividend increase was in 2013 and it was for 2.7%.

The 5 year median Dividend Payout Ratio is at 99% for Earnings and 68% for Cash Flow. It is expected that the DPR for earnings will be around 135% for 2013 and 103% for 2014, before falling below 100% in 2015. (These are just estimates and do not forget estimates are often wrong.) My analysis basically says that the company cannot afford the dividends it is paying.

Another problem I see with this company is the Liquidity Ratio. It is very low because it includes current portion of long term debt and commercial paper. The commercial paper portion is most of the debt I have subtracted from current debt to raise the Liquidity Ratio. Without the commercial paper the ratio only rises to 0.76. This ratio only rises to only to 1.01 for the financial year ending in 2012 if we consider cash flow less dividends.

If you look at the current Liquidity Ratio (for the 1st quarter of 2013), the numbers get worse. The current Liquidity Ratio is just 0.12. After talking off the commercial paper and looking at cash flow after dividends, the Ratio is only 0.71.

When the Liquidity Ratio is less than 1.00, it means that current assets cannot cover current liability. The problem with such low Liquidity Ratios as this company has is that problems can come up quickly and they would not have any breathing room to sort out debt. With the commercial paper it is turn over annually and there is always the possibility it will not be.

I know that most utilities count on cash flow to help with current expenses. However, I feel that this company could all of a sudden find itself in a very vulnerable position, debt wise. This is not good.

I must say that shareholders have done well with this stock over the past 5 and 10 years, with the total return being at 26.79% and 22.39%. The dividend portion of this return was 6.98% and 8.11% per year over the past 5 and 10 years. The capital gain portion of this return was 19.88% and 14.25% per year over the past 5 and 10 years.

The 5 year low median and high median Price/Earnings Ratios are 11.82, 14.30 and 16.78. The current P/E is 28.28 based on a stock price of $23.19 and a 2013 earnings estimate of $0.82. (Earnings estimates were changed downward because the company missed the Q1 2013 earnings estimate) Also earnings over last 12 months to Q1 2013 are down 4.4% from last year.

I get a current Graham Price of $10.64. The 10 year low, median and high Price/Graham Price Ratios are 1.05, 1.17 and 1.32. The current P/GP Ratio is 2.18. I think for that for a utility you should be buying at a price that gives a P/GP at or close to 1.00. The current one is way over the historical ones.

The 10 year Price/Book Value per Share Ratio is 1.88. The current P/B Ratio is 3.78 a value 100% higher. A test on the current dividend yield to the 5 year one will not give us anything as the dividend yield has been coming down because of income trust companies converting to corporations.

When I look at analysts' recommendations, I find Strong Buy, Buy and Hold recommendations. Since almost all the recommendations are a Buy, the consensus recommendation would be a Buy. The 12 month stock price consensus is $26.60. This implies a 19.62% return, with 4.92% from dividends and 14.9% from capital gains.

This company intends to convert to a corporation later this year. Some analysts view this in a positive light. With this change they are buying out their General Partner and will no longer need to pay fees to this general partner. Others see this buyout as being very expensive and are unimpressed. See an article on this Calgary Herald. Some analysts mention the good yield. Others think that buying a pipeline company is a good idea. I really do not like the very weak balance sheet this company has. I think that his stock is way overpriced. See my spreadsheet at ipl.htm.

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.

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 or StockTwits.


  1. Susan, I like the way you come to your own conclusion based on the numbers, not on the hype. I came to similar conclusions about other highly popular and, in my opinion, way-over-valued dividend growth stocks such as ENB, TRP, and FTS. I sold some of these shares and realized nice gains, repositioning into cheaper stocks with solid balance sheets. Recent changes in market sentiment / direction seem to be proving me correct (at least in the near term). At any rate, I repeat, I think it wise to look carefully at such things as balance sheet, debt, and valuation, and not be simply lured in by a dividend. Cheers, Jay

  2. IPL.UN is a bit overpriced, so I will hold my position now.

    Always good analysis Susan,

  3. With you for the most part. After another 50-60% increase in price, I don't know whether you've changed your view on this stock. But that is reality, logical analysis don't always support empirical evidence.
    I am taking this security analysis course with my Columbia educated investing savvy prof, who said this was a value stock. That is why I was here, gathering opinions on this stock.
    Yeah, sure this stock has done well in the past, and it has a lot of growth prospects. But that was about it!
    At the price it is today, after growing some 100% over the last few years, it MUST be too expensive!
    It CANNOT have a safety margin that is greater than 30%! And it is risky! because of the large CAPEX! yeah, everyone says the projects are great, but who knows what might go wrong.
    I would say it is a growth stock rather than a value stock. Peace.

  4. Wang: You have not got to my second entry where I talk about this stock being expensive.

    If I were a shareholder I would be concerned about the debt ratios, especially the Liquidity Ratio. The problem with a low Liquidity Ratio is that it makes the stock vulnerable especially if there is any economic problem. And, the economics are not great at the present time.

    Whenever I say anything about this stock, current holders always reply that they have made good money on this stock. However, the past is not the future.