Pembina Pipeline Corp. (NYSE:PBA) isn't a name that most investors are probably familiar with since it's a Canadian company. Not only that, but it's much smaller than its more well-known national rivals Enbridge (NYSE:ENB) and TransCanada (NYSE:TRP), which have made their share of headlines in the U.S. due to some controversial pipeline projects.
Because Pembina Pipeline has flown under the radar, most investors have missed out on this intriguing income stock. Not only does the company offer a well-above-average dividend yield of 5.1%, but it pays its investors each month instead of just on a quarterly basis. Those are just some of the reasons why investors might want to take a closer look at this underfollowed Canadian pipeline stock.
Pembina Pipeline 101
Pembina Pipeline operates a diversified business that transports and processes hydrocarbons in several regions of the U.S. and Canada. The company currently owns nearly 11,200 miles of pipelines that move 3 million barrels of oil equivalent per day. In addition to that, it's the largest third-party natural gas processor in the Western Canadian Sedimentary Basin (WCSB), as well as the largest natural gas liquids (NGL) fractionator (facilities that separate the raw NGL stream into ethane, butane, and propane) in that region.
Long-term, fee-based contracts underpin the bulk of the company's assets. Because of that, the company gets 85% of its earnings from stable fees, which is up from 77% in 2015. That allows Pembina to generate steady cash flow to support its high-yielding dividend. Currently, the company plans on paying out only around 55% to 60% of its cash flow this year, which is down from 72% in 2015 even though Pembina has increased its dividend each year. That's a very conservative payout ratio for a pipeline company, and a little less than its well-known peers, as both Enbridge and TransCanada are currently paying out about 65% of their cash flow in dividends.
Pembina reinvests the rest of its cash in finance growth projects. The company currently has about 2 billion Canadian dollars ($1.5 billion) of expansions underway and CA$13.5 billion ($10.4 billion) more in development.
Filling up its growth engine
Pembina recently sanctioned several new projects due to strong demand for transportation services in the WCSB. Two of those came in late September after the company secured contracts to support new infrastructure projects in the fast-growing Montney shale.
The first project is a new 20-mile pipeline that will connect growing volumes from a third-party processing facility in the region to the company's Peace Pipeline. Pembina will construct that project in tandem with the CA$280 million ($215 million) Phase VI expansion of Peace that it sanctioned in May. That will enable the company to benefit from construction efficiencies as well as align the in-service timing of both projects, which should be in the second half of next year. In addition to that, the company announced that it secured a customer commitment to construct some new infrastructure at its Birch Terminal to support additional volumes on its recently expanded northeast B.C. pipeline. Overall, the company expects to invest CA$120 million ($92 million) into these two projects.
Beyond these latest additions, Pembina has around CA$3.5 billion ($2.7 billion) of near-term opportunities that it's pursuing, including additional processing facilities and new pipeline expansions. Meanwhile, the company has a more-than-CA$10 billion ($7.7 billion) of longer-term expansion opportunities in front of it to extend its reach further downstream by building facilities that consume natural gas and NGLs. The company is working with a subsidiary of Kuwait's national oil company to develop two petrochemical plants that would turn propane into a feedstock for plastics at an estimated cost of CA$4 billion ($3 billion). In addition to that, the company has proposed building a liquified natural gas (LNG) facility along the coast of Oregon, which would enable it to export cheap natural gas from the WCSB to high-demand markets in Asia. These projects have the potential to supply the company with needle-moving growth in the future.
A compelling income growth stock to consider
Pembina Pipeline tends to get lost in the shadow of its larger Canadian peers TransCanada and Enbridge since they offer higher yields of 5.2% and 6.3%, respectively, which they both expect to increase at a double-digit annual rate through at least 2020. However, Pembina does offer income investors the rare opportunity to get paid every month. Add that to the fact that it has a rock-solid dividend that it will likely grow at a mid-single-digit annual rate in the coming years thanks to its growing supply of expansion projects, and it's an intriguing opportunity that income seekers won't want to miss.