Great Canadian Dividend Buys: Large-Cap Pipelines

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Includes: ENB, KMI, PBA, TRP
by: Canadian Dividend Growth Investor

Summary

Exploring 3 large-cap Canadian pipelines that have continued to maintain and increase their dividends since oil prices plummeted.

Which of Enbridge, TransCanada, or Pembina pays out the safest dividend of the group?

Which company has the best dividend prospects?

Should investors buy these Canadian pipeline companies now or wait?

What brought me to write this piece was a fellow follower wishing to see an article on Canadian great buys. Particularly, she's interested in Enbridge Inc [TSX:ENB](NYSE:ENB) and TransCanada Corporation [TSX:TRP](NYSE:TRP). Since others liked her comment, I decided more investors would benefit from an article on Canadian dividend stocks than I had initially thought.

Kinder Morgan Inc (NYSE:KMI) got a lot of attention when it slashed its dividend by 75%. At the same time, its share price has fallen over 60% from more than $40 to under $16. Yet, strong Canadian energy infrastructure leaders such as Enbridge Inc and TransCanada Corporation have not only maintained but continued to grow their dividends. At the same time, they have also been sold off due to lower oil prices.

With the strong U.S. dollar against the Canadian dollar, it makes good sense for American investors to consider Enbridge and TransCanada if investors believe oil prices will improve. After all, the Canadian dollar is a resource-based currency. Higher oil prices should lead the Canadian dollar higher against the U.S. dollar.

Because of the pullback, Enbridge and TransCanada are also more attractive dividend investments than they were a year ago for Canadian and American investors alike. Pembina Pipeline Corp. (NYSE:PBA) is another large cap possibility.

Ticker

Price (1 year ago)

Price Now

Price Change

Yield (1 Year Ago)

Yield Now

Yield Change

TSX:ENB

C$60.8

C$47.2

-22%

3.1%

4.5%

+45%

NYSE:ENB

US$48.8

US$33.9

-31%

TSX:TRP

C$57.5

C$49.4

-14%

3.6%

4.2%

+17%

NYSE:TRP

US$46.1

US$35.5

-23%

TSX:PPL

C$38.6

C$31.2

-19%

4.5%

5.9%

+31%

NYSE:PBA

US$31

US$22.5

-27%

Click to enlarge

Source: Google Finance

Enbridge increased its dividend by 14% this year and it would be its 21st consecutive year increase. Enbridge targets to grow its dividend at a CAGR of 14-16% through 2019. The company's dividend growth would be supported by its growing available cash flow from operations.

Pembina hiked its dividend by 5.2% in May; it has increased it for 4 consecutive years. TransCanada should be announcing its dividend hike for this year by the end of March, which would be its 16th consecutive year increase. TransCanada targets to grow its dividend by 8-10% per year through 2020.

Are Their Dividends Sustainable?

Enbridge, TransCanada, and Pembina Pipeline are only more attractive than a year ago if they can maintain healthy, growing dividends. Can they?

Based on consensus analyst estimated cash flows for the fiscal year 2016, Enbridge's payout ratio is 37%, TransCanada's payout ratio is less than 37% (after applying a dividend hike of 8-10% for this year), and Pembina's payout ratio is 71%.

Based on consensus analyst estimated earnings for the fiscal year 2016, Enbridge's payout ratio is 86%, TransCanada's payout ratio is less than 87-89% (after applying a dividend hike of 8-10% for this year), and Pembina's payout ratio is 138%.

For comparison's sake, based on consensus analyst estimated cash flows for the fiscal year 2016, Kinder Morgan's payout ratio is 28%, and its payout ratio based on earnings is 70%.

Pembina's earnings do not cover its dividend. Its dividend is less sustainable than Kinder Morgan's. But of course, Kinder Morgan already cut its dividend and only yields 3.2% while Pembina yields 5.9%. Enbridge and TransCanada have similar payout ratios. However, TransCanada is viewed as a safer investment than Enbridge because TransCanada has an S&P credit rating of A- and debt/cap of 53% while Enbridge has an S&P credit rating of BBB+ and debt/cap of 62%. On the other hand, Enbridge is viewed as a higher growth investment because it takes on a higher percentage of debt to fuel growth.

Conclusion

Out of these four large-cap pipelines, Canadian and American investors alike are better off investing in Enbridge or TransCanada with safer and higher dividends, and faster dividend growth.

In the last quarter of 2015, both Enbridge and TransCanada hit attractive yields of 5%. However, they were scary moments at the time because it was around the time Kinder Morgan cut its dividend. Both Enbridge and TransCanada's prices have since headed higher and their yields lower.

That said, fundamentally, Enbridge and TransCanada are still more attractive buys than a year ago -- Enbridge with higher dividends, and higher cash flows for both companies. However, they have rallied about 17% in three weeks, so interested investors should wait for a dip or some action sideways before buying.

Which are your favorite large-cap pipeline picks? Share in the comments below!

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Disclaimer: This article consists of my opinions and are for educational purposes only. Please do your own research and due diligence and consult a financial advisor and or tax professional if necessary before making any investment decisions.

Disclosure: I am/we are long KMI, TRP, ENB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I'm long ENB and TRP on the TSX.