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Income investors who don’t own at least one pipeline stock are missing out on a great source of cash flow. All of Canada’s major pipeline companies are yielding 5.9% or more at current prices. The dividends are well protected and are usually increased every year. There is little likelihood of a cut. That’s not to say it can’t happen.
Back in December 1999, TransCanada Pipelines (now TC Energy) stunned the markets by announcing a surprise 28.6% cut in its payment, from $1.12 a year to $0.80 – this after repeated promises the dividend was safe. Angry investors sold, driving down the share price by almost 15% in one day.
Conceivably, history could repeat, but it’s unlikely. TransCanada’s reputation took a huge hit, and it took years for the stock to recover. Pipeline companies are now more protective of their payouts.
What they can’t protect is the share price. Rising interest rates have played a major role in knocking down the value of these stocks in the past 18 months. TC Energy shares are down 31% since May 2022. Enbridge has lost 20%, while Pembina Pipeline has slipped about 13%. I expect the share price of these companies will rebound as rates stabilize and that all will increase their dividends by around 5% in 2024.
Here are updates on my Income Investor newsletter pipeline picks. Prices as of the close of trading on Nov. 24.
TC Energy Corp. (TSX: TRP) shares have been drifting down for most of the year, in part due to rising interest rates and in part because of huge cost overruns on the Coastal GasLink project. However, we have seen some recovery recently.
TRP reported a loss for the third quarter of $197 million (-$0.19 per share) compared with a profit last year of $841 million ($0.84 a share). Year-to-date, net income was $1.4 billion ($1.33 per share), down from $2.1 billion ($2.11 per share) in 2022.
The good news is that the mechanical phase of the long-delayed and very expensive Coastal GasLink pipeline was finally completed ahead of its revised year-end schedule. TRP’s share of the cost was $5.4 billion.
TRP owns a 35% stake in the 670 km pipeline, which it will operate. When it enters service next year, the pipeline will transport gas from the interior of BC to a new LNG terminal in Kitimat. There it will be liquified and exported to global markets. This will be the first LNG export terminal in Canada. Based on the cost and the difficulties and delays in building it, there may never be another.
In another development, TRP successfully completed the sale of a 40% non-controlling equity interest in its Columbia Gas and Columbia Gulf pipeline systems to Global Infrastructure Partners (GIP) for $5.3 billion.
The company has announced plans to spin off its oil pipelines division as a separate company but has yet to provide details.
With the construction burden of Coastal GasLink behind it, a divestiture program to clean up the balance sheet, and the likelihood interest rates will stabilize, 2024 should be a better year for this stock.
Enbridge Ltd. (TSX: ENB) stock was hit hard in September after the company announced it will purchase three U.S. gas distribution utilities. It touched a 52-week low of $42.75 in October but has recovered slightly since.
Enbridge reported a drop in third-quarter earnings attributable to shareholders. The company had a profit of $532 million ($0.26 per share), compared with $1.3 billion ($0.63 a share) in the same quarter of 2022. Enbridge said the drop was primarily due to non-operating factors, including the 2022 gain of $1.1 billion on the closing of a joint venture merger transaction with Phillips 66.
For the first nine months of the year, Enbridge said earnings were $4.1 billion ($2.02 per share), up from $3.7 billion ($1.80 per share) last year. Adjusted EBITDA in the third quarter increased by $113 million compared with the same period in 2022.
Results for the first nine months of 2023 were in line with expectations, and Enbridge says it anticipates that its businesses will continue to experience strong capacity utilization and operating performance through the balance of the year, with normal course seasonality.
The yield is the highest of these three pipeline stocks, but investors have been nervous about the company’s high debt load for some time. The gas utilities purchase only fuels those concerns. The p/e ratio of 31.5 is high for a utility. If you own shares, keep them, but if you’re making new purchases, I’d look at TC Energy or Pembina for better total return potential.
Pembina Pipeline Corp.’s (TSX: PPL) third-quarter results were down from last year. Revenue was $2.3 billion, compared with $2.8 billion in the same period last year. For the first nine months of the 2023 fiscal year, revenue was $6.7 billion, a big drop from $8.9 billion in 2022.
Third-quarter earnings were $346 million ($0.57 a diluted share), down from $1.8 billion ($3.23 a share) last year. The decrease was primarily due to the benefit in the prior year from a gain on the change in ownership of the majority of Pembina’s field-based gas processing assets.
For the nine months, earnings were $1.1 billion ($1.78 per share). Last year, Pembina earned $2.7 billion ($4.73 a share) in the same period. On the positive side, third quarter adjusted EBITDA was a record $1.021 billion, up 6% from last year. The company raised its 2023 adjusted EBITDA guidance range to $3.75-$3.85 billion (previously $3.55-$3.75 billion).
In addition to paying a quarterly dividend of $0.6675 per share, Pembina is also buying back stock. Over the nine months to the end of September, the company repurchased approximately 1.2 million shares at a total cost of $50 million.
The stock has the lowest yield of the three, but the share price held up much better as rates were rising. Pembina’s management and directors repeatedly assured investors the dividend would be protected during the darkest days of the pandemic, and they kept their word.
All three stocks would be good fits for an income portfolio. In terms of capital gains potential, I would rate TC Energy as my top choice for 2024, followed by Pembina. As always, consult with your financial advisor before investing to ensure the stocks fit with your objectives, allocations, and risk tolerance.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Follow Gordon Pape on X at X.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2023 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
Image: iStock.com/mdisk
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