Pembina Pipeline (TSX:PPL) has underperformed its sector peers in the last year. Contrarian investors are wondering if PPL stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends.
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Pembina Pipeline stock
Pembina Pipeline trades near $51 per share at the time of writing. The stock chalked up a nice rally from $39 in October 2023 to $60 at one point late last year, but has since been on a downward trend.
Energy infrastructure stocks are sensitive to changes in interest rates. Rate hikes that occurred in 2022 and 2023 are largely to blame for the slide in the stock from $52 in June 2022 to below $40 in 2023. The rebound that began in the fall of 2023 coincided with news from the central banks in Canada and the United States that they were done raising interest rates. Rate cuts in the second half of 2024 provided the tailwind for PPL and its peers through the second half of last year.
Pipeline companies use debt to fund part of their growth investments. Projects often cost billions of dollars and can take years to build. A steep jump in borrowing costs reduces cash that can be used to pay dividends or reduce debt. Higher rates can also force companies to shelve some planned projects, slowing growth.
Pembina Pipeline earnings
Pembina Pipeline positions itself as a type of one-stop shop for energy producers in Canada and the United States. The company has a liquid pipelines division that moves commodity products from the production site to storage or other destinations, including hubs and processing facilities.
Pembina also owns natural gas gathering and processing facilities as well as natural gas liquids (NGL) infrastructure, including a propane export terminal on the coast of British Columbia.
Finally, the marketing and new ventures division buys and sells commodities and is responsible for investing in large projects, including the company’s interest in the Cedar liquified natural gas (LNG) export facility under construction in British Columbia.
Q1 2025 earnings came in at $502 million compared to $438 million in the same period last year. All three of the core divisions delivered better year-over-year results, with the largest improvement in the Marketing and New Ventures group. Swings in commodity prices can have a large impact on the division’s results.
On the growth side, the company expects cash flow from operations to fully fund operating expenses, dividend payments, and capital expenditures. This is important for investors who are seeking stocks with attractive and sustainable dividend payments. Management says the company is on track to land in the midpoint of its 2025 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance.
Pembina recently raised the dividend by 3%. Investors who buy the stock at the current level can get a dividend yield of 5.6%.
Time to buy?
Volatility is expected, but Pembina Pipeline pays an attractive dividend that should continue to grow. Investors seeking high-yield stocks might consider taking advantage of the latest pullback to start a position. Further weakness would be viewed as a good opportunity to add to the holdings.
Interest rates are widely expected to decline further over the next 12 months. Assuming that happens, energy infrastructure stocks could pick up a new tailwind.
