The Oxford Club’s Chief Income Strategist, Marc Lichtenfeld, takes a look at Pembina stock and its dividend safety rating.
A little more than a year ago, I wrote that Pembina Pipeline (NYSE: PBA) would earn a dividend safety upgrade if 2019’s free cash flow projection was on the mark.
It wasn’t. Not even close.
In March 2019, the Canadian pipeline company was forecast to generate CA$1.44 billion in free cash flow. Instead, it generated just CA$887 million while paying out CA$1.32 billion in dividends.
In other words, it paid out CA$1.48 in dividends for every CA$1 in free cash flow.
This year, free cash flow is expected to grow 10% to CA$975.3 million, which still won’t cover the CA$1.38 billion the company will likely pay shareholders.
That figure includes the cash flow generated from the portion of pipeline acquired from Kinder Morgan (NYSE: KMI) last December.
When a company doesn’t generate enough cash to pay the dividend, it must dip into cash on hand or borrow money.
Another problem for Pembina is that it has borrowed a lot of money already. The company has more than CA$10.6 billion in debt.
Its debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio, a measure that we use in SafetyNet Pro, is more than 4, which is too high.
In other words, Pembina’s debt is more than four times the amount of EBITDA.
The Calgary, Alberta-based oil and gas pipeline company has never cut its dividend since it began paying one in 2010, and it has raised its dividend each year since 2012. So that’s positive.
Pembina Stock and Company Cash Flow
Pembina’s cash flow doesn’t cover the dividend, and it doesn’t appear that it will anytime soon. So the company will have to go further into debt to pay shareholders.
In a normal environment, perhaps that’s sustainable for a while. But we are no longer in a normal environment.
Considering Pembina’s lack of cash flow and high debt load, the dividend cannot be considered safe. In fact, the stock not only failed to get an upgrade from last year, but also has fallen two notches to the lowest rating for dividend safety.
Dividend Safety Rating: F
Pembina Dividend Watch
As you can see, Pembina stock is not safe at the moment. Keep a close watch on the pipeline company’s dividend going forward.
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About Marc Lichtenfeld
Marc Lichtenfeld is the Chief Income Strategist of Investment U’s publisher, The Oxford Club. He has more than three decades of experience in the market and a dedicated following of more than 500,000 investors.
After getting his start on the trading desk at Carlin Equities, he moved over to Avalon Research Group as a senior analyst. Over the years, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report, among other outlets. Prior to joining The Oxford Club, he was a senior columnist at Jim Cramer’s TheStreet. Today, he is a sought-after media guest who has appeared on CNBC, Fox Business and Yahoo Finance.
Marc shares his financial advice via The Oxford Club’s free daily e-letter called Wealthy Retirement and a monthly, income-focused newsletter called The Oxford Income Letter. He also runs four subscription-based trading services: Technical Pattern Profits, Penny Options Trader, Oxford Bond Advantage and Predictive Profits.
His first book, Get Rich with Dividends: A Proven System for Earning Double-Digit Returns, achieved bestseller status shortly after its release in 2012, and the second edition was named the 2018 Book of the Year by the Institute for Financial Literacy. It has been published in four languages. In early 2018, Marc released his second book, You Don’t Have to Drive an Uber in Retirement: How to Maintain Your Lifestyle without Getting a Job or Cutting Corners, which hit No. 1 on Amazon’s bestseller list. It was named the 2019 Book of the Year by the Institute for Financial Literacy.
