Pembina Pipelines

Pembina Pipelines (PPL) recently popped up on my radar while looking for an energy stock with good income potential over the medium term. I'd originally been considering Duke Energy (DUK), but settled on this one instead.

Reasons to hold

The PPL dividend is slightly higher than the DUK one, and it has a long history of growing that dividend. However, all is not rosy because that growth has slowed in recent years. There are a bunch of projects in the pipeline that, should everything go to plan, will charge that growth rate again but in the interim I'll have to be happy to pocket a 4.8% yield. And the ex-div date for this quarter's dividend is this coming Friday.

Compared to it's peers, it's also the most attractively valued. A trailing P/E of 12.6x and a forward be of 14.5x makes it cheaper than DUK and SO at the moment.

Overall the long-term view seems to be that PPL has much to look forward to, but has some short-term uncertainty about it. As a result I'm going to buy it but also look to maximize my short-term income.

The trade

Just before the last close trading I bought 300 shares of PPL @ $30.70. When the market opens tomorrow I'll look to sell the 21st Sept 2013 call option at $31.00 for $0.22. I'm hoping that the recent trading range continues and that the stock doesn't trade at or above $31.00 before Friday. What would be great is if the stock traded just above $31.00 on Monday morning, because here's the result:

  • $0.22 option premium x 300 shares = $66.00
  • $0.3675 dividend payment x 300 shares = $110.25
  • $0.30 capital gain ($31.00 sale price - $30.70 purchase price) x 300 shares = $90.00

A total gain of $266.25, or almost 3% for holding the stock for a week. The other likely outcomes are that the stock increases $0.30 to more than $31.00 and I get exercised early (the most probable outcome given there is a guaranteed dividend of $0.36 on Friday), or that the shares drop and I'm left holding them because the option isn't exercised.

I'm fine holding them as I'm hoping to ride them well into 2015 when their new projects come online. Whatever happens the trade is going to make between $156 and $266 in income this week.

Published on in Trades