When you’re trying to assess a company’s growth potential, a great place to look for clues is in its Dividend Payout Ratio, or DPR, which is the percentage of earnings paid out to shareholders in the form of dividends.
A high DPR can, but not always, be commonly associated with strong cash flow and a high earnings forecast. While it’s true that some businesses are unable to sustain high payout ratios, unconventional thinking brings the idea that dividends are technically paid from cash flow; hence, current earnings may not be the best indicator of financial health. For investors seeking regular income, companies with a high and sustainable DPR should be the prime focus. Here are three companies with a DPR of more than 60%.
Payout ratio of the companies
| Company Name | % of Payout ratio (>60%) |
|---|---|
| Kinder Morgan Energy Partners LP (NYSE:KMP) | 508.00% |
| Enbridge Inc (USA) (NYSE:ENB) | 105.90% |
| TransCanada Corporation (USA) (NYSE:TRP) | 63.20% |
Here are the strategies adopted by these oil and gas companies to maintain that high payout ratio.
Oil transportation through railroad
Kinder Morgan Energy Partners LP (NYSE:KMP) has cancelled its plan to construct the Freedom Pipeline, which was proposed in April, 2013. This is because potential shippers decided to capitalize on the geographic advantages of railroads rather than the proposed pipeline. The pipeline would have transported crude from Texas to California, whereas transportation via railroad will be from North Dakota to California. Kinder Morgan Energy will now pay $12 per barrel for transportation via railroad.
Even after paying higher transportation charges, the total cost of oil acquisition will remain the same, because North Dakota’s crude oil is cheap. Kinder Morgan Energy Partners LP (NYSE:KMP) will save the $2 billion cost of infrastructure construction that would have gone to the pipeline.
In March 2013, Kinder Morgan Energy Partners LP (NYSE:KMP) acquired 50% of El Paso Natural Gas and a 50% stake in El Paso Midstream assets, located in Utah and South Texas, respectively. The total cost of this deal was around $1.65 billion. By partnering with EI Paso Natural Gas, Kinder Morgan Energy Partners LP (NYSE:KMP) added 10,200 miles of pipeline with a capacity of around 5.6 billion cubic feet per day, cf/day.
Their midstream assets include pipelines of 1,200 miles and almost 450 wells; additionally, it runs a processing plant with expanded capacity of 80 million cf/day and 5,600 bpd of natural gas. With this acquisition, the company posted growth of 24%, year-over-year, in the company’s earnings, amounting to $1.27 billion in the first-quarter of 2013.
Analysts expect that the company will generate total revenue of $12.04 billion this year. Further, its plan to cancel freedom pipeline will generate savings, which will lead to a distributable cash flow of $3.8 billion this year. This will help the company to distribute good dividend yield in the upcoming quarters too.
Boost in revenue with increased capacity
On May 14, 2013 Enbridge Inc (USA) (NYSE:ENB) announced that it signed a deal with ConocoPhillips Canada Resources and Total E&P Canada to expand infrastructure at Cheecham Terminal, in the Surmont Oil Sand Project in Alberta, Canada.
Enbridge Inc (USA) (NYSE:ENB) completed the first phase of the Surmont Oil Sand Project in 2012. In the second phase, the company will invest $300 million to increase the warehouse capacity for bitumen. Enbridge Inc (USA) (NYSE:ENB) will construct two new 450,000 barrel blend tanks and modify its existing tank from blend to diluent service, in order to facilitate transfers to its Waupisoo Pipeline. These services are scheduled to begin in the first part of 2015. The second phase of the Surmont Project will take total production to 136,000 bpd of bitumen, up from 27,000 bpd in the first phase.
Moreover, the company is planning to expand its Seaway pipeline, which started in May 2012. Seaway transports oil between the Cushing and Freeport refinery hubs on Texas’s Gulf Coast. The refinery is presently transporting 150,000 bpd, and plans to increase capacity to 400,000 bpd by the end of current year. Furthermore, the company has plans to double the refinery’s capacity to 850,000 bpd, and will invest $1.1 billion to make this happen. This project is scheduled to start operations in the first-quarter of next year. It is expected that this additional capacity will increase the company’s earnings by $500 million through 2017.
In the first-quarter 2013, the company had a cash of $1.40 billion. In the long term, these two projects will start generating cash for the company, which will help it to provide good dividends, and optimize its existing operations.
Expansion strategies drive higher profits
TransCanada Corporation (USA) (NYSE:TRP) has entered into a deal to sell its 45% stake in Gas Transmission Northwest, and its Bison Pipeline to TC Pipelines, LP (NYSE:TCP) .
TransCanada Corporation (USA) (NYSE:TRP) is selling these assets in order to increase investment in infrastructure expansion. After this deal, TC PipeLines will see an increase in its stake of Gas Transmission Northwest and Bison, from 25% to 70%. Gas Transmission Northwest is valued at $1.05 billion, which includes its debt of around $146 million, and the deal will close in July 2013. Thus, TransCanada will have ownership rights of 30% in Gas Transmission Northwest and Bison, as well as its 33% stake in TC PipeLines. This will reduce TransCanada’s debt and increase its available cash by $904 million. Moreover, the annual Earnings Before Interest, Taxes Dividends and Amortization (EBITDA) will increase by 1.9%, year-over-year, amounting to $90 million from the current fiscal year.
To increase its transport and warehouse capacity, the company will construct the Heartland Pipeline and TC Terminal. Collectively, the company estimates these projects to cost around $900 million. The Heartland Pipeline, just under 125 miles, will run between Edmonton and Hardist, in Alberta. The pipeline will increase TransCanada Corporation (USA) (NYSE:TRP)’s transport capacity by around 900,000 barrels of crude oil per day and the terminal will have a warehousing capacity of around 1.9 million barrels of crude oil.
Crude oil production in Alberta, Canada is expected to increase by 3 million bpd for the next 15 years. With this expected rise, the company is planning to increase transport and warehouse capacity. It already has the Keystone pipeline to transport crude oil in the Alberta region; the existing pipeline is about 2,175 miles, with a capacity to transport 400 million barrels of crude oil from Alberta to the U.S.
These expansions will help the company to post total revenue of $9.57 billion in this fiscal year, in comparison to $7.93 billion last year. Also, it generated a total cash of $451.48 million in the first quarter of 2013. This rising revenue, along with increased cash flow for the company will help TransCanada Corporation (USA) (NYSE:TRP) to continue paying higher dividend in the upcoming quarters.
A new extension totaling over 1,700 miles of the Keystone pipeline, also known as the Keystone XL pipeline is further planned. This would expand the reach of the pipeline by adding a segment from Oklahoma to the Gulf Coast of Texas, and would also create a new route from Alberta to Nebraska. However, environmentalists fear that, if this pipeline is built — it will significantly expand the market for crude oil, and will add to the risk of global climate change. President Obama recently outlined in his speech that, this project will be rejected, unless its clear that it won’t lead to global warming.
He said:
“Allowing the Keystone pipeline to be built requires a finding that doing so would be in our nation’s interests,” the President said, adding “our national interest would be served only if this project does not significantly exacerbate the problem of carbon pollution.”
Source: keystonepipeline–xl.state.gov
Bottom line
Kinder Morgan Energy Partners LP (NYSE:KMP) has cancelled its plan to construct the Freedom Pipeline, and will transport its crude oil through railroad, which will cut down infrastructure cost. It has also expanded its capacity by acquiring EI Paso Natural Gas and El Paso Midstream assets.
Enbridge Inc (USA) (NYSE:ENB), under Surmont Phase Two, plans to expand its infrastructure at Cheecham Terminal, which will enhance its production capacity. Further, the company is doubling its Seaway pipeline. These expansions will boost Enbridge’s earnings.
TransCanada Corporation (USA) (NYSE:TRP) has plans to construct the Heartland Pipeline and TC Terminal to meet Albertan requirements. Moreover, it has reduced its debt and increased its cash available by selling its stake in Gas Transmission Northwest and Bison Pipeline.
All three of these stocks are a “buy.”
The article Don’t Avoid These 3 Companies With High Payout Ratios originally appeared on Fool.com and is written by Madhu Dube.
Madhu Dube has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Madhu is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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