First Look at Plains All American Pipelines (PAA).

  Today I take a look at Plains All American Pipeline (PAA).  This is the last of fifteen articles examining some of the dividend stock recommendations of Seeking Alpha contributor Insider Monkey.  Most of these stocks have dividend yields of 4% - 5%, so I think that they need to be looked at because they could become high dividend stocks when the stock market pulls back from another worldwide recession.  I want to see which of his 15 are potential high dividend stocks with earning power and strong balance sheets.  Plains has a high dividend payout ratio, it is speculatively priced, and its balance sheet is blah.  To see how I arrived at those conclusions and what a good value price to buy at read on.

Plains All American Pipeline (PAA)

Price: $79.99

Shares: 155.57 million

Market capitalization: $12.44 billion

What does the company do to please customers - Plains All American Pipeline, L.P. (PAA) is engaged in the transportation, storage, terminalling and marketing of crude oil, refined products and liquefied petroleum gas (LPG) and other natural gas-related petroleum products. It is also engaged in the acquisition, development and operation of natural gas storage facilities. It has three segments: Transportation, Facilities, and Supply and Logistics. PAA’s operations are conducted through, and its operating assets are owned by, PAA’s subsidiaries. On December 23, 2010, PAA acquired Nexen Holdings U.S.A. Inc. On February 9, 2011, the Company, through its subsidiary PAA Natural Gas Storage, L.P., acquired 100% interest in SG Resources Mississippi, LLC. In July 2011, Gavilon, LLC acquired refined products rack marketing business from the Company. In December 2011, it acquired South Texas crude oil and condensate gathering system and a Canadian trucking operation. In December 2011, it acquired Yorktown Terminal and Jal Pipeline.

Morningstar’s Take - Plains All American Pipeline LP built itself into one of the most successful master limited partnerships by focusing on one thing: supplying the Midwest with crude oil to run its refineries. Plains is expanding its geographic and product focus to include the entire United States and extend the model that has worked so well for crude oil to refined products, natural gas liquids, liquefied petroleum gas, and natural gas.

Preferred stock: I’m not sure how many shares, but there has been preferred stocks since 2009 that receives about a quarter of net income.  For example, in 2011 Net income was $966 million dollars before a $236 million dollar preferred dividend.  That is 24.4%.  This is a threat to the common dividend.

Bonds: $250 million outstanding.  This isn’t a threat to the common dividend.

DIVIDEND RECORD: Wow!  PAA is an amazing dividend grower.  It paid $0.19 quarterly in 1999.  Thirteen years later it is paying $1.02 quarterly.  That is a 437% increase in 13 years, or 33% straight line dividend growth per annum.

Dividend: $1.02 quarterly

Dividend yield: 5.1% ($4.08 annual dividend / $79.99 share price)

Dividend payout: 83% using recent Google Finance EPS of $4.93 –OR- 145% using average adjusted earning power of $2.82.  This company almost always paid out more than it earned in the past 10 years.  It makes up the difference by constantly offering new shares each year.

EARNING POWER: $2.82 @ 155.57 million shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created.  In PAA’s case they are steadily adding shares)

	EPS	Net income	Shares	Adjusted EPS
2007	$2.52	$365 M	114 M	$2.35
2008	$2.64	$325 M	121 M	$2.09
2009	$3.32	$443 M	131 M	$2.85
2010	$2.40	$330 M	138 M	$2.12
2011	$4.88	$730 M	155.57 M	$4.69

Five year average adjusted earnings per share is $2.82.

Consider contrarian buying below $22.56 (8 times average adjusted EPS)

Consider value buying below $33.84 (12 times average adjusted EPS)

Consider speculative selling above $56.40 (20 times average adjusted EPS)

Plains All American Pipeline (PAA) is currently trading at 28.4 times average adjusted EPS.  This is stock is speculatively priced.

BALANCE SHEET – Blah balance sheet.

Book value per share: $35.03

Price to book value ratio: 2.28 (under 1.0 is good)  This is way too high for my liking.  Wait for a big price drop.

Current ratio: 0.96 latest quarter (over 2.0 is good) This company is a little short of current assets to cover this year’s liabilities.  I’m guessing they will offer more shares to make up the difference.

Quick ratio: 0.005 latest quarter (over 1.0 is good)  This company is cash starved.

Debt to equity ratio: 0.96 (lower is better)  This is not great, but not too bad either.

Percentage of total assets in plant, property, and equipment: 50.32% (the higher the better).  PAA has 21% of assets in receivables, 12% in intangibles, and 9% in long term assets.

CONCLUSION - The best time to buy PAA in recent years was in late 2008.  It was a value investment back then.  Plains All American Pipelines is an amazing dividend payer and grower, but I’m concerned that the preferred stock and capital expenditures are going to threaten the dividend growth in the future.  The company is speculatively priced at this time at over 28 times average adjusted earnings.  Wise investors should have scaled out of it when it reached $56.40 back in October 2011.  Keep selling portions and rising your stops is the key to scaling out.  The balance sheet is weak when you look at the price to book value ratio and the current ratio and quick ratios.   The company is going to have to issue more debt or stock to finance its current operations.  You can safely ignore this stock until it drops back to the $35.00 to $22.00 dollar range.

DISCLOSURE – I don’t own Plains All American Pipelines (PAA).

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