Attractive valuation makes Spectra Energy (SEP) an intriguing candidate despite the low 2% dividend increase?

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Spectra Energy’s (NYSE: SEP) dividend was increased by 2% with an overall yield above that of the S&P 500 Index at 6.51%. Spectra Energy is a natural gas company that provides storage and transportation.

The firm operates a sizable portfolio of assets in the natural gas infrastructure market. It also maintains an excellent crude oil pipeline system connecting oil producers to refiners. Spectra Energy has paid dividends on a consecutive basis for 8 years.

Spectra Energy currently ranks 10th in yield within the large cap basic materials oil and gas pipelines category. Spectra Energy has maintained a solid three-year growth rate of dividends of 9.2 percent. The firm also released Q3 earnings of $0.31 cents a share, which was better than analyst estimates of $0.25.  However, its operating revenue fell short of estimates at $1,103 million.

The quarterly dividend for the November payment will be $0.67625 versus the prior year rate of $0.66375 per share. Spectra Energy Partners is a member of our Top 100 Dividend Stocks (see below).

top-100

The dividend will be paid at the new higher rate on November 29, 2016, to shareholders of record at close of business on November 14, 2016. Spectra Energy is currently priced at $41.52. Listed in the table below are the quarterly dividend payments since 2010.

Date Quarterly Dividend
11/14/2016 0.676
8/11/2016 0.664
5/12/2016 0.651
2/10/2016 0.639
10/27/2015 0.626
8/12/2015 0.614
5/13/2015 0.601
2/11/2015 0.589
11/13/2014 0.576
8/14/2014 0.566
5/15/2014 0.556
2/12/2014 0.546
10/29/2013 0.516
8/1/2013 0.509
5/7/2013 0.501
2/5/2013 0.495
11/2/2012 0.49
8/1/2012 0.485
5/2/2012 0.48
1/31/2012 0.475
11/3/2011 0.47
7/29/2011 0.465
4/29/2011 0.46
2/2/2011 0.45
10/29/2010 0.44
7/30/2010 0.43
4/30/2010 0.42
1/29/2010 0.41

Analysis of Spectra Energy Partners LP is based upon our five key criteria, which include; 

Category Value Score
Dividend Yield 6.51%  19
Dividend Growth (3-6 year avg) 8.4%  253
Forward P/E 11.57  43
S&P Financial Rating BBB  160
Beta 0.95  100
Total Score    575

Additional Information on P/S ratio and historical yield;

% Yield 3 Year Div. Growth Rate 6 Year Div. Growth Rate SPS 2016 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr lowest Yield % 5 yr max Yield %
6.51% 9.2% 7.6% 8.48 4.90 4.90 15.80 3.75% 7.94%

Positives;

  • Spectra Energy’s dividend yield is above that of the S&P 500 Index.
  • Spectra Energy maintains a 3 year dividend growth rate of 9.2%.
  • Spectra Energy maintains a credit rating of BBB. This is investment grade.
  • Spectra Energy’s forward P/E ratio is just over 11, below that of the market.
  • Spectra Energy is trading at the bottom of its ten-year average price/sales (P/S) range.
  • Spectra Energy has paid out a dividend consecutively for the past 8 years.
  • Spectra Energy’s current dividend yield (6.51%) is above its five-year average historical dividend yield of 5.85%.
  • Spectra Energy maintains a beta of 0.95, lower than the average company.

Overall Analysis:

The largest impact on the value of Spectra is the impending merger with Enbridge. The two pipeline companies agreed in September to merge in a deal that could start the
largest energy-infrastructure company in North America. The stock-for-stock deal will have Enbridge shareholders holding 57 percent of the new combined company while Spectra’s shareholders will own 43 percent.

One item of importance is that the merger will also offer shareholders a 15 percent annualized dividend increase in 2017 and an expected low double-digit increases in the next seven years. Cost savings are also a large part of this merger as combined it is expected that over $400 million in cost will be wrung out.

Based the firm’s merger savings with Embridge and key assets like Texas Eastern Transmission, the new firm will become a preeminent firm within its industry. It also has solid dividend growth prospects, low forward P/E, high credit rating, and a juicy 6.50% yield.  Spectra Energy Partners LP is our favored energy pipeline play is a member of our  Top 100 Dividend Stocks list (#33). 

Spectra Energy Partners LP Dividend Yield Chart (Click to enlarge)

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Chart Explanation:  Dividend growth stocks may be viewed favorably when the current yield is above historical readings for the past 5 years.

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