Because Pembina Pipeline (NYSE: PBA) is a Canadian company, it's not a familiar name for most U.S. investors. That's causing them to miss out on what has been an excellent income stock over the years. Aside from consistently increasing its payout, what sets Pembina apart from most peers is that it pays its investors monthly, which makes it a great way to supplement your income.
While that monthly paycheck alone is one reason investors won't want to overlook this stock in 2019, it has a couple of major catalysts that could soon come to fruition, making it even more compelling.
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Set up for steady growth in 2019 and beyond
Pembina Pipeline outlined its expectations for 2019 in early December, noting that it expects to produce between $2.8 billion and $3 billion Canadian ($2.1 billion to $2.3 billion) in EBITDA this year. At the midpoint of the range, it's a 4% increase from last year. While that's a slower growth rate than previous years, that's because the company has fewer expansion projects under way after finishing CA$5.5 billion ($4.2 billion) of new assets in 2017 and 2018 while only expecting to invest CA$1.6 billion ($1.2 billion) in 2019, more than half of which will go toward longer-term projects. Overall, the company has about CA$3.1 billion ($2.3 billion) of expansions that should come online through the first half of 2021 that should boost EBITDA by $300 million and $450 million Canadian ($226 million to $430 million) on an annual basis.
That outlook bodes well for income investors, since Pembina's current dividend, which yields 5.2%, consumes only about 55% to 60% of its cash flow. That leaves it with a significant amount of excess cash to fund expansion projects. Meanwhile, it can easily bridge the gap with incremental debt, since its leverage ratio is below its target range and therefore has the room to continue increasing its dividend in 2019. Historically, it has given its investors a 5% raise each year, which is a likely outcome again in 2019.
Catalysts to keep an eye on this year
While Pembina has fewer expansion projects currently under construction than it had in past years, that could change since it has several in development. Two of the largest are a petrochemical complex in Canada that's part of a joint venture with a Kuwaiti oil company and a liquified natural gas (LNG) export facility on the U.S. West Coast. These two projects represent an investment opportunity of more than CA$10 billion ($7.5 billion) for Pembina.
The company has earmarked a few hundred million dollars toward both projects in 2019 so that it can lay the groundwork needed before giving them the green light. Pembina hopes that this capital will enable it to get the permits and other required agreements so that it can officially sanction the LNG export facility by November while aiming to make a final investment decision on the petrochemical plant earlier in 2019. If the company moves forward with both projects, it will have a much clearer view of its long-term growth prospects.
In addition to those two large-scale projects, Pembina has several other smaller ones in development. Overall, the company is working on securing CA$4.5 billion ($3.4 billion) of opportunities, which include additional expansions of its Peace pipeline, more processing plants in Canada, and other opportunities. Moving forward with more of these projects would enable Pembina to continue growing earnings and its dividend while it works on completing its two larger ones, since the LNG facility, for example, wouldn't start up until 2024 at the earliest.
An interesting income stock for the long haul
Pembina Pipeline expects its earnings to continue expanding in 2019, which should give the company the fuel to boost its payout once again this year. However, in addition to collecting that income stream each month, the company has compelling long-term upside from the expansion projects it has in development. That combination of income and growth potential makes it an income stock that investors won't want to overlook.
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