Is Inter Pipeline’s 7% Yield Worth the Risk?

Inter Pipeline Ltd (TSX:IPL) currently pays investors a dividend of 7.3%. With distributions made monthly, it could present an attractive opportunity to generate some significant cash flow. The problem is that oil and gas stocks have been on the decline, and in the past year the stock has been down nearly 20%, and in just the past month it has dropped 10% in value. 

Unfortunately, investors have focused more on the underlying commodity prices rather than the company’s recent performance. Inter Pipeline has been profitable in each of the past five quarters and sales were up over 10% in its most recent reporting period.

You would expect that a strong performance like that would bring some optimism back to the stock, but that hasn’t been the case. Oil prices will unfortunately weigh heavily on the minds of investors because even though Inter Pipeline is doing well right now, that could all change if the commodity price were to crash yet again.

If we look at the past few years, Inter Pipeline has done a good job of growing its free cash flow and in 2017, dividends were less than 50% of free cash, which was an improvement over the prior year when payouts accounted for more than 75%.

In the short term, Inter Pipeline’s financials are certainly strong and suggest the dividend is safe, but it’s the long term that has investors concerned. While it may be tempting to try and lock-in a high yield, the share price could continue to go lower, especially if oil prices don’t recover from this latest setback.