Inter Pipeline Ltd.

Sound bite for Twitter and StockTwits is: Dividend growth stock, very low Liquidity Ratio. The problem with low Liquidity Ratios is that it can make a company vulnerable in bad times. The lower ROE on Comprehensive Income is not a good sign either. See my spreadsheet at ipl.htm.

I do not own this stock of Inter Pipeline Ltd. (TSX-IPL, OTC-IPPLF). In 2008, 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.

The thing that I noticed in doing my spreadsheet is that this company has a very low Liquidity Ratio. In 2014 it was 0.13. The last time it was over 1.00 was in 2006. Even if you strip out the current portion of the long term debt and the revolving commercial papers the Liquidity Ratio only rises to 0.41. And, if you add in cash flow less dividends it is 0.65.

The thing with this stock is that they use DRIPs. This means that they do not have to pay all their dividends in cash, but give out additional stock instead. So, if I add in cash flow and just subtract dividends paid in cash the Liquidity Ratio is 1.08 instead of 0.65. The problem with low Liquidity Ratios is that this makes a company vulnerable in the bad times and recessions do crop up on a regular basis. I prefer companies with a Liquidity Ratio of at least 1.50. The problem with revolving commercial paper is that it may be cancelled at any time. Another vulnerability for this company.

This is a dividend growth stock. The dividend is good and the increases are moderate. The current dividend is 5.14% and the 5 year median dividend yield is 5.04%. The 5 and 10 year dividend growth is at 9.2% and 6% per year.

Because dividends are good and increasing, it does not take long for your stock's purchase price to be covered by dividends. If you bought this stock 5 and 10 years ago today, 45.6% and 105.6% of the stock price would have been covered by dividends. Also, if you had bought this stock 5 or 10 years ago, you could be earning 11.3% or 15.3% dividend yield on your original purchase price. These both are dependent on you paying a median price for your stock.

Shareholders have done well over the past 5 and 10 years with total return at 19.98% and 17.38% per year. The portion of this total return from dividends is at 6.09% and 6.36% per year. The portion of this total return from capital gains is at 13.89% and 11.02% per year.

Outstanding shares have increased over the past 5 and 10 years by 5.1% and 6.1% per year. Shares have increase due to share issues and DRIP. This makes the per share values the most important ones. The Revenue growth is moderate to good. The EPS share growth is moderate to good as is Cash Flow.

Revenue has grown at 11% and 12.4% per year over the past 5 and 10 years. Revenue per share has grown at 5.6% and 5.9% per year over the past 5 and 10 years. Analysts expect good growth in Revenue in 2015 at around 15%. However, if you look at the 12 months to the end of 2014 compared to the 12 months to end of the first quarter, Revenue is down slightly by 0.3%.

EPS has grown at 9.1% and 6.9% per year over the past 5 and 10 years. There has been a lot of fluctuation in EPS year to year. If you look at the 5 year running averages, EPS has grown at 8.7% and 12.7% per year over the past 5 and 10 years. Analysts expect growth in EPS of around 44% in 2015. If you look at the 12 months to the end of 2014 compared to the 12 months to end of the first quarter, EPS is up by 6.9%. It is going in the right direction.

Cash Flow is up by 13% and 18.6% per year over the past 5 and 10 years. CFPS is up by 8.4% and 7.6% per year over the past 5 and 10 years. Analysts expect Cash Flow to grow by 33% in 2015. If you look at the 12 months to the end of 2014 compared to the 12 months to end of the first quarter, Cash Flow is up by 4.3%. It is going in the right direction.

Return on Equity has been below 10% twice in the past 5 years and 4 times in the past 10 years. The ROE for 2014 was 9.9% and the 5 year median was 17.5%. The ROE on comprehensive income is lower at 9.3% for 2015 and 15.5% at the 5 year median. The lower ROE on comprehensive income suggests that the earnings may not be all they appear to be.

I have already talked about the Liquidity Ratio. The Debt Ratio is fine at 1.64, but its 5 year median value is a bit low at 1.45. The Leverage and Debt/Equity Ratios are a little high, but these ratios are not uncommon for utility stocks. Ratios for 2014 were at 2.56 and 1.56 respectively.

When I look at analysts' recommendations, I find Strong Buy, Buy and Hold recommendations. The consensus recommendation is a Buy. The 12 month stock price consensus is $34.40. This implies total return of 25.46% with 20.32% from capital gains and 5.14% from dividends. The 12 month stock consensus price seems a little high to me.

This is the first of two parts. The second part will be posted on Wednesday, July 22, 2015 and will be available here. The first part talks about the stock and the second part talks about the 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 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. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

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