Which Canadian Mid-Cap Pipelines Pay Out Safe Dividends?

| About: Keyera Corp. (KEYUF)

Summary

Exploring 5 mid-cap Canadian pipelines that have maintained their dividends since oil prices have plummeted. Interestingly, some even increased their dividends twice in the last 12 months.

Mid-cap businesses are safer than small-caps, and mid-caps could provide higher returns than large caps.

Which of Altagas, Enbridge Income Fund, Inter Pipeline, Keyera, or Veresen pays out safer dividends compared with the group?

The previous article on large-cap pipelines was primarily about Enbridge Inc [TSX:ENB](NYSE:ENB), TransCanada Corporation [TSX:TRP](NYSE:TRP), and Pembina Pipeline Corp. [TSX:PPL](NYSE:PBA). From that article's comments readers showed interest in mid-cap pipelines.

Putting together the votes I decided to write about five mid-cap companies in this article: Altagas Ltd [TSX:ALA](OTCPK:ATGFF), Enbridge Income Fund Holdings Inc [TSX:ENF](OTC:EBGUF), Inter Pipeline Ltd [TSX:IPL](OTCPK:IPPLF), Keyera Corp [TSX:KEY](OTC:KEYUF), and Veresen Inc [TSX:VSN](OTC:FCGYF).

Mid-cap pipeline companies should provide higher returns than the large-caps when commodity prices improve because of the smaller sizes of the mid-caps. At the same time, mid-cap businesses are safer than small-caps.

Just like the large-cap pipelines, the mid-cap pipelines have also been sold off due to lower oil prices. As a result, the mid-cap pipelines now offer higher yields than a year ago. Veresen's yield is at a whopping 14.6%! The question is whether that yield is sustainable.

With the strong U.S. dollar against the Canadian dollar, it makes sense for American investors to consider mid-cap pipelines 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.

This industry-wide dip makes the mid-cap pipelines attractive dividend investments for Canadian and American investors alike. However, it only makes sense to consider the mid-cap pipelines if their yields are sustainable.

First, let's compare the mid-cap pipelines' prices and yields from a year ago.

Company

Price (1 year ago)

Price Now

Price Change

Yield (1 Year Ago)

Yield Now

Yield Change

Altagas

C$45.8

C$30.2

-34%

3.9%

6.6%

+69%

Enbridge Income Fund

C$41.5

C$26.3

-37%

3.7%

7.1%

+92%

Inter Pipeline

C$32.8

C$20.5

-38%

4.5%

7.6%

+69%

Keyera

C$37.5

C$34.5

-8%

3.5%

4.3%

+23%

Veresen

C$15.8

C$6.9

-56%

6.3%

14.6%

+132%

Click to enlarge

Prices and yields are based on the listed securities on the TSX as of February 10 closing.

Source: Google Finance

Does the highest yield wins? I don't think so…

Glancing through the table, one may be tempted to buy Veresen whose yield increased the most in the past year and has the highest yield of 14.6%. However, the yield increase was entirely due to its price decline because it has only maintained its monthly dividend from a year ago. If anything, Veresen's huge price decline is hinting that a dividend cut may come down the road, but we'll explore on its dividend sustainability later in the article.

On the other hand, Inter Pipeline had a dividend increase of 6.1% within the last year. Altagas, Enbridge Income Fund, and Keyera even had two dividend increases within the last year. Enbridge Income Fund came out on top with a total dividend increase of 21%, Keyera came in second with a total increase of 15.7%, and Altagas came in third with a total increase of 11.9%.

Specifically, Inter Pipeline has increased its dividend for seven consecutive years. This year would mark its eighth annual increase if it at least maintained its current monthly dividend for the rest of the year.

Keyera and Enbridge Income Fund have increased their dividends for five consecutive years. This year would mark their sixth annual increase if they at least maintained their current monthly dividends for the rest of the year.

Altagas has increased its dividend for four consecutive years. This year would mark its fifth annual increase if it at least maintained its current monthly dividend for the rest of the year.

Having a dividend growth history is a good thing, but are their current dividends supported by earnings and cash flows?

Are Their Dividends Sustainable?

Altagas, Enbridge Income Fund, Inter Pipeline, Keyera, and Veresen are only more attractive than a year ago if they can maintain healthy dividends. Can they?

The following payout ratio analysis assumes the pipelines' monthly distributions are maintained (not cut or increased) in the next year. Click to enlarge

The consensus analyst estimated cash flow growth of 17% for this fiscal year adds a safety net for Altagas's dividend and would bring its payout ratio to 50%.

Click to enlarge

The consensus analyst estimated cash flow growth of 21% for this fiscal year is the highest among the group and would bring Enbridge Income Fund's payout ratio to 82%.

Click to enlarge

Consensus analyst estimated cash flow growth of only 1% for Inter Pipeline for this fiscal year, but the pipeline's payout ratio of 68% still provides some safety for its dividend.

Click to enlarge

Consensus analyst estimated cash flow to decline for Keyera. However, its payout ratio of 40% covers its dividend with ample cushion.

Click to enlarge

Based on consensus analyst estimated cash flows for this fiscal year, Veresen's payout ratio would be 102%, which makes its dividend unsustainable.

Based on consensus analyst estimated earnings for the fiscal year 2016, Veresen's payout ratio is 323%, Inter Pipeline's payout ratio is 111%, Altagas's payout ratio is 146%, Keyera's payout ratio is 80%, and Enbridge Income Fund's payout ratio is 86%.

Cash flows is a metric that makes more sense to determine dividend sustainable for pipeline companies. However, if these pipelines' dividends are covered by both cash flows and earnings, then that makes their dividends all the more secure.

Only Keyera's and Enbridge Income Fund's dividends are covered by both cash flows and earnings.

Credit ratings and debt levels

  • Altagas has an S&P credit rating of BBB and debt/cap of 41%

  • Enbridge Income Fund is not rated by S&P because its debt/cap is 0%

  • Inter Pipeline has an S&P credit rating of BBB+ and debt/cap of 43%

  • Keyera is not rated by S&P, but has debt/cap 49%

  • Veresen has an S&P credit rating of BBB and debt/cap of 27%

Conclusion

Mid-cap pipelines could provide higher returns than large-cap pipelines when commodity prices head higher because of the smaller sizes of the mid-caps.

Out of these 5 mid-cap pipelines, Canadian and American investors alike are better off exploring Keyera or Enbridge Income Fund whose dividends are covered by cash flows and earnings and perhaps Altagas whose paying out 50% of its cash flows. So, they provide safer dividends than the others with the likelihood of higher dividend growth.

At the end of the day, commodity prices need to improve permanently for these companies to truly turn around. In the meantime, their prices are quite volatile and moves with the commodity price fluctuations. While shareholders wait for stock price appreciation, they can get paid monthly dividends of 4-7%.

Next, I plan to write about the Big Three telecoms: BCE Inc. [TSX:BCE](NYSE:BCE), Telus Corporation [TSX:T](NYSE:TU), and Rogers Communications Inc. [TSX:RCI.B](NYSE:RCI) because readers have shown the most interest in them through the comment stream of my previous article.

Share in the comments below!

  • Which mid-cap pipelines do you have on your watchlist?

  • Do you have other Canadian dividend companies you're interested in? Comment below and I might just write about it.

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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 ENB,TRP,IPPLF,TU.

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, TRP, IPL, and T on the TSX.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.