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 lots of utility stocks. They used to be a Limited Partnership and they changed to a corporation in 2013.
When I was updating my spreadsheet, I noticed that no matter how you look at it, the Liquidity Ratio is very low. The 5 year median is just 0.15 where what you want in this ratio is one that is 1.50 or above. The ratio for 2019 is just 0.14. If you add in cash flow after dividends and just use dividends paid in cash, plus add back the current portion of long term debt it is just 1.25. This could become a problem is they cannot roll over current debt.
The dividend yields are currently moderate with dividend growth low. This company recently reduced the dividends by 72%. The current dividend yield is moderate (2% to 4% ranges) at 3.91%. The dividend yields used to be higher. The 5 and 10 year median dividend yields are good (5% to 6% ranges) at 6.38% and 6.00%. The historical median dividend yield is high (7% and over) at 8.21%. This company used to be a Limited Partnership and as such had very high dividend yields. In 2000 dividend yields were over 17%.
This company used to be a limited partnership and similar to income trusts where yields were high and payouts could be higher than earnings. However, when these companies become corporations, they have to get their dividends under earnings. This company tried to do this and still give increasing dividends. They had not gotten the dividends lower than earnings nor were they able to raise the earnings to cover the dividends. They had been doing increases in the low range (under 8%), until they decreased the dividends this year. However, analysts think that they will increase the dividends again in a couple of years.
The Dividend Payout Ratios (DPR) need to be improved. The DPR for 2019 for EPS is 130% with 5 year coverage at 117% and these rates are too high. The DPR for CFPS for 2019 is 89% with 5 year coverage at 68%. For this DPR you would want to have the ratio at 40% or less. The DPR for Free Cash Flow for 2019 is 84% with 5 year coverage at 99%. These are also too high. It is interesting that Morningstar, Wall Street Journal and Market Screener all disagree on the FCF, but whatever one you use the ratios are too high. Analysts think these ratios might be good by 2021.
Debt Ratios are need improving, but have always been ugly. The Long Term Debt/Market Cap Ratio for 2019 is 0.45. It is higher currently at 0.83 because of a big drop in the stock price. The Liquidity Ratio is just 0.14 for 2019. If you add in Cash Flow after dividends and add back in the current portion of the Long Term Debt, it is still low at just 1.25. It gets even lower currently at 1.02. This is as low as the Liquidity Ratio has ever got. You want it at 1.50 or high.
The Debt Ratio is low at 1.46 and it has a 5 year median of 1.50. This is ok but I prefer it be 1.50 or above. The Leverage and Debt/Equity Ratios are 3.17 and 2.17 and these are too high. I prefer them to be less than 3.00 and 2.00.
The Total Return per year is shown below for years of 5 to 22 to the end of 2019. Under the Capital Gain column is the portion of the Total Return attributable to capital gains. Under the Dividend column is the portion of the Total Return attributable to dividends. See chart below.
| From | Years | Div. Gth | Tot Ret | Cap Gain | Div. |
|---|---|---|---|---|---|
| 2014 | 5 | 5.55% | -3.50% | -8.91% | 5.41% |
| 2009 | 10 | 7.37% | 16.30% | 7.62% | 8.68% |
| 2004 | 15 | 5.84% | 14.15% | 6.19% | 7.97% |
| 1999 | 20 | 5.04% | 18.57% | 7.93% | 10.64% |
| 1997 | 22 | 3.87% | 10.18% | 3.76% | 6.42% |
The 5 year low, median, and high median Price/Earnings per Share Ratios are 15.13, 18.46 and 21.08. The corresponding 10 year ratios are 15.13, 17.86 and 20.50. The corresponding historical ratios are 15.13, 17.86 and 19.92. The current P/E Ratio is 18.61 based on a stock price of $12.28 and EPS estimate for 2020 of $0.66. This stock price testing suggests that the stock price is relatively reasonable but above the median.
I get a Graham Price of $12.03. The 10 year low, median, and high median Price/Graham Price Ratios are 1.31, 1.55 and 1.82. The current P/GP Ratio is 1.02 based on a stock price of $12.28. This stock price testing suggests that the stock price is relatively cheap.
I get a 10 year median Price/Book Value per Share Ratio of 2.98. The current P/B Ratio is 1.26 based on a Book Value of $4, 147M, Book Value per Share of $9.75 and a stock price of $12.28. The current ratio is 58% below the 10 year median ratio. This stock price testing suggests that the stock price is relatively cheap.
I get a 10 year median Price/Cash Flow per Share Ratio of 11.23. The current P/CF Ratio is 7.44 based on 2020 CFPS estimate of $1.65, Cash Flow of $702M and a stock price of $12.28. The current ratio is 34% below the 10 year median ratio. This stock price testing suggests that the stock price is relatively cheap.
I get an historical median dividend yield of 8.21%. The current dividend yield is 3.91% based on dividends of $0.48 and a stock price of $12.28. The current yield is 52% below the historical median dividend yield. This stock price testing suggests that the stock price is relatively expensive.
I get a 10 year median dividend yield of 6.00%. The current dividend yield is 3.91% based on dividends of $0.48 and a stock price of $12.28. The current yield is 35% below the historical median dividend yield. This stock price testing suggests that the stock price is relatively expensive.
The 10 year median Price/Sales (Revenue) Ratio is 4.59. The current P/S Ratio is 2.33 based on 2020 Revenue estimate of $2,238M, Revenue per Share of $5.26 and a stock price of $12.28. The current ratio is 49% below the 10 year ratio. This stock price testing suggests that the stock price is relatively cheap.
Results of stock price testing is that the stock price is probably relatively cheap. The P/S Ratio test is showing the stock price as cheap and so is the P/B Ratio test. The problems with the dividend yield tests is that dividends have just been cut by 72% and as this company used to be a Limited Partnership, past dividend yields would have been unusually high.
The P/CF test is also showing the stock price as cheap and there is nothing wrong with this test. The P/E Ratio tests is showing the price as reasonable but above the median. However, EPS is expected to drop a lot this year, so this would make the P/E Ratio relatively high. There is nothing wrong with the P/GP Ratio tests except possibly the same problem as the P/E Ratio tests. This test is showing the stock price as cheap.
Is it a good company at a reasonable price? Generally, pipeline companies are the place to be as they tend to be good dividend growth stocks. However, I do not like the debt ratios on this stock and especially the Liquidity Ratio. Low Liquidity Ratios can get a company in trouble if there is a sudden economic problem and a company cannot roll over their debt.
When I look at analysts’ recommendations, I find Strong Buy (1), Buy (2) and Hold (14). The consensus would be a Hold. The 12 month stock market consensus stock price is $13.06. This implies a total return of $10.26% with 6.35% from capital gains and 3.91% from dividends.
There are several Don’t Buy by analysts on Stock Chase. Chris MacDonald on Motley Fool says that it is a buy if you think management can right this ship. In June 2020, a writer on Simply Wall Street said that the dividend was non-sustainable. The company talks about raising debt on BOE Report in May 2020. In March 2020 Reuters had an article about this company cutting its dividend and halting the planned sale of its European bulk liquid storage business.
Inter Pipeline operates crude oil pipelines, natural gas liquids extraction, and bulk liquid storage businesses in Canada and Europe. Its web site is here Inter Pipeline Ltd.
The last stock I wrote about was about was Morneau Shepell Inc (TSX-MSI, OTC-MSIXF) ... learn more. The next stock I will write about will be TMX Group Ltd (TSX-X, OTC-TMXXF) ... learn more on Monday, July 13, 2020 around 5 pm.
Also, on my book blog I have put a review of the book The Reality Bubble by Ziya Tong learn more...
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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