Yahoo Finance Should Weakness in Pembina Pipeline Corporation's (TSE:PPL) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?
With its stock down 4.6% over the past month, it is easy to disregard Pembina Pipeline (TSE:PPL). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Pembina Pipeline's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Pembina Pipeline
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Pembina Pipeline is:
19% = CA$3.0b ÷ CA$16b (Based on the trailing twelve months to December 2022).
The 'return' is the profit over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.19.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Pembina Pipeline's Earnings Growth And 19% ROE
To start with, Pembina Pipeline's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 23%. Consequently, this likely laid the ground for the decent growth of 6.3% seen over the past five years by Pembina Pipeline.
Next, on comparing with the industry net income growth, we found that Pembina Pipeline's reported growth was lower than the industry growth of 35% in the same period, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is PPL worth today? The intrinsic value infographic in our free research report helps visualize whether PPL is currently mispriced by the market.
Is Pembina Pipeline Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 88% (or a retention ratio of 12%) for Pembina Pipeline suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Besides, Pembina Pipeline has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 91%. Regardless, Pembina Pipeline's ROE is speculated to decline to 13% despite there being no anticipated change in its payout ratio.
Summary
In total, it does look like Pembina Pipeline has some positive aspects to its business. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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