Investment Grade 6% Yield, Monthly Payer, No K-1: Pembina Pipeline

Summary

• PBA yields 6.65% and pays monthly, and issues a 1099 at tax time.
• It has strong 1.65X coverage.
• Its debt is rated BBB stable, investment grade by Morningstar and S&P.
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Photo by kozmoat98/E+ via Getty Images

The International Energy Agency estimates that "total oil and natural gas demand is expected to increase 16% by 2040, supplying 52% of the world’s energy needs. Energy demand will be driven by a 19% increase in the world’s population and rising per capita energy use, supporting improved global living standards." (Pembina site)

Profile:

Calgary, Canada,-based Pembina Pipeline Corporation (NYSE:PBA) provides transportation and midstream services for the energy industry. It operates through three segments: Pipelines, Facilities, and Marketing & New Ventures. PBA is a member of the Toronto Exchange 60 Index, and has paid approximately $9.5 billion in dividends since inception.

NOTE: Except for price/share, all $ amounts are in Canadian currency, unless otherwise noted.

PBA's pipeline segment provided 65% of 2020 adjusted EBITDA, facilities contributed 30%, and marketing and new ventures kicked in 6%:

(PBA site)

The commodity mix is split 40/30/30 between Crude Oil & Condensates, Natural Gas Liquids - NGL's, and Natural Gas. A key factor for PBA's business model is the fact that 77% of its operations are supported by Take-or-Pay cost of service, with 17% Fee-for-Service, leaving just 6% exposed to commodity fluctuation:

(PBA site)

An interesting advantage that PBA has over US Gulf Coast pipeline operators is its much shorter round trip transit time to Asia of only ~20 days.

Seeing that a good share of the growth in energy demand in coming years is likely to be in Asia, that suggests that PBA should be in a good position to capitalize on that growth for years to come.

(PBA site)

A mature company, PBA has weathered numerous energy cycles in the past several years since the financial crisis. It reached the high $40s in September 2014, briefly sank to $10-$11 in the 2020 COVID Crash, and currently sits at ~$30.84, AS OF intraday 4/29/21.

(PBA site)

Thanks to the 31% rise in crude oil, PBA has outpaced the S&P 500 so far in 2021 by a wide margin, while keeping pace with the Alerian MLP ETF, and slightly lagging the broad-based Energy Select SPDR ETF.

Like many energy stocks, PBA sits very near its 52-week high:

Earnings:

Like most other firms in various sectors, PBA's net income took a hit in 2020 from non-cash impairments - PBA's writedown was $2.09B, sending NI down to -$316M.

Adjusted EBITDA was actually up ~7%, while total revenue fell by -14%.

PBA's management uses adjusted operating cash flow/share, AOCF, as its distribution sustainability metric - it fell -4.59% in 2020, but still produced strong distribution coverage of 1.65X, or a payout ratio of 60.58%.

Total common distributions/share increased by 6.78%, to $2.52, vs. $2.36 in 2019.

2021 Guidance:

Management issued adjusted EBITDA guidance of $3.2 to $3.4B, which brackets the $3.28B PBA earned in 2020, so its distribution and interest coverage should remain stable.

Capex: They also issued 2021 capex guidance of $785M. They reduced 2020 capital spending by ~$1 billion, thereby strengthening liquidity.

PBA's 2021 capital investment program is fully funded by cash flow from operating activities after dividends, even at the low end of the adjusted EBITDA guidance range. There are $1.145B in projects due to come into service in 2021 - 2023:

(PBA site)

Profitability and Leverage:

We compiled some comps for midstream firms vs. PBA's 2020 figures. PA's ROA and ROE turned negative in 2020 due to the big impairment writeoffs, so no joy there. However, its EBITDA margin looks much higher than average, while its debt/equity leverage looks much lower than average.

While EBITDA did rise, interest/net finance costs rose much quicker in 2020, leading to a decline in the Interest coverage ratio to a still healthy 7.81X:

Debt and Liquidity:

Management adds in 50% of PBA's preferreds and hybrids, coming up with a 4.4X edbt/adjusted EBITDA ratio, which looks to be stable in 2021 - they're targeting a 3.75 - 4.25X senior debt leverage ratio:

(PBA site)

2022 is the heaviest year for near-term debt maturities, with both senior debt and term loans coming due:

(PBA site)

Subsequent to quarter end, on Jan. 25, 2021, Pembina closed an offering of $600 million of Fixed-to-Fixed Rate Subordinated Notes, Series 1 (the "Subordinated Notes, Series 1"). The Subordinated Notes, Series 1 have a fixed coupon of 4.80 percent per annum, are payable semi-annually and mature on January 25, 2081.

PBA's debt is rated BBB stable, investment grade by Morningstar and S&P.

Valuations:

PBA's P/Book and its EV/EBITDA look much cheaper than midstream industry averages. While we don't have an industry average for price/DCF, PBA's 7.41X is much cheaper than some other midstream firms we've covered, which run anywhere from ~ 7X to ~12X.

Analysts' Price Targets:

PBA's price gains have outrun analysts' low price target by 8.4%, and its 4/29/21 price puts it just 1.44% below the $31.29 average price target:

Distributions:

PBA pays $CAN $.21 monthly, generally going ex-dividend in the last week of the month, and paying in the middle of the following month. Its five-year average dividend growth rate is ~6%.

Using the 4/29/21 exchange rate, shows PBA's monthly payout as ~$.17/share in US $., giving it a 6.65% dividend yield.

Currency Risk:

Speaking of exchange rates, currency risk can be a factor which affects US citizens' monthly PBA distributions. The chart shows the movements of the Canadian $ vs. the US $ since 2016, with a peak coming in 2017, and a valley hitting during the 2020 COVID Crash, followed by a big reversal.

Over the last year, the Canadian dollar has risen ~13.6% vs. the US dollar.

Taxes:

PBA issues a 1099-DIV to US investors at tax time - not a K-1. There's a 15% withholding tax for US citizens, which can be offset by claiming a Foreign Tax Paid credit on US tax returns.

"Pembina anticipates that its dividends paid to U.S. individual investors will be considered 'qualified dividends', as determined for U.S. federal tax purposes, eligible for reduced rates of taxation, provided that certain holding period and other requirements are met. Pembina does not anticipate any portion of its dividends to be a non-taxable return of capital. Dividends paid by Pembina will be communicated to shareholders via a Form 1099-DIV." (PBA site)

Options:

Like many of the dividend stocks we cover in our articles, PBA also has options available. However, they're thinly traded. You can see more details for this trade on our Cash Secured Puts Table.

NOTE: Put sellers don't receive dividends, we include them in our tables so that viewers can compare them to the options premiums. We use annualized yields in our options tables, so users can compare trades of varying lengths.

PBA's August $30.00 put option has a bid of $1.45, giving you a breakeven of $28.55, which is very close to analysts' lowest price target of $28.44. The yield is 4.8% in under 4 months, or 15.89% annualized.

Summary:

Given the solidity of PBA's finances, its well-covered monthly dividends, and its other positive attributes, we rate it as a speculative buy due to it being so close to its 52-week high. Patient investors could wait for a market pullback, or, try selling puts below its price/share.

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PBA over the next 72 hours. 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.

Our DoubleDividendStocks.com service features options selling for dividend stocks. It's a separate service from our Seeking Alpha Hidden Dividend Stocks Plus service. Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.