In February, pipeline stock Enbridge Inc. became the poster company for what can happen when a stable, solid, dividend-producing blue chip stock takes a walk on the wild side, at least according to investors.
The day after the Enbridge Inc.’s February 27 announcement that it was completing its purchase of Spectra Energy—and borrowing money to close the deal—shareholders began a three-day assault on the shares that didn’t stop until Enbridge’s stock had plunged by more than 20 per cent. While the stock has since recovered somewhat, it’s a far cry from its mid-$50 range last fall. What’s an investor to do?
Enbridge Inc. (TSX—ENB; NYSE—ENB) peaked at $66 a share in 2015, and its shares are down by nearly 40 per cent since then. This underscores some investors’ worry about the utility’s finances and its ability to raise the dividend. Then again, the shares have lots of room to recover. Should the market’s expectations improve, the shares could jump.
The big share-price gains potential is likely why the consensus of five analysts is ‘Buy’. What’s more, on March 15, Enbridge executive vice-president and chief legal officer Bob Rooney acquired 6,100 shares at $40.80 a share. This raised his total holding to 10,500 shares. Insider buying is a positive indicator. Mr. Rooney must expect that the shares will recover. We agree.
Enbridge remains a buy for a long-term share price recovery as well as high and growing dividends. But due to considerable risk, it should be a modest part of a well-diversified portfolio.
Largest North American energy infrastructure company
Calgary-headquartered Enbridge Inc. serves the oil and gas industry. Its key activity involves gathering and transportation of crude oil and natural gas.
The acquisition of Spectra Energy Corp. makes Enbridge the largest North American energy infrastructure company. It operates “leading liquids, natural gas transmission and natural gas distribution utilities”.
Enbridge issued a significant number of its common shares to help pay for Spectra. With more shares outstanding, Enbridge’s earnings slipped to $1.96 a share. This was down by 16 per cent from earnings of $2.28 a share, the year before.
This year, Enbridge is expected to earn $2.23 a share. This would represent a respectable increase of 13.8 per cent from $1.96 a share, last year.
This year’s expected earnings are less than the dividend of $2.68 a share. Even next year’s higher, expected earnings of $2.45 a share fall short. The thing is, Enbridge and the analysts’ focus is on the company’s distributable cash flow per share.
This year, Enbridge is expected to generate distributable cash flow of $4.27 a share. This would represent a healthy gain of more than 16 per cent from $3.68 a share last year. This would comfortably exceed this year’s dividend.
Enbridge is a ‘dividend aristocrat’. That’s because it has raised its dividend each year for many years in a row. Management says that it plans to raise its dividend by a compounded 10 per cent a year through 2020.
3-pronged plan to reduce debt, increase revenue
Enbridge’s net debt stood at a hefty $64.7 billion on New Year’s Day. But there are some positive developments. One is that it plans to sell assets to raise $3 billion and repay debt. It wants to reduce its debt-to-EBITDA ratio to a manageable five times. (EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization assesses a company’s underlying earnings.)
A second positive development is that Enbridge expects to raise another $3.5 billion by issuing hybrid securities.
A third positive development is that Enbridge’s 2017 revenue jumped by more than 28 per cent, to $44.4 billion. This reflected higher volumes on the Canadian Mainline, Lakehead and Regional Oil Sands networks. Also, Enbridge put into service $8.2 billion worth of capital projects. This year, the company is expected to put in service another $7 billion of capital projects. This high and growing revenue makes it easier for Enbridge to grow, pay dividends and reduce its debt.
The acquisition of Spectra greatly diversifies Enbridge’s business. It earns substantially more in the US. In addition, the acquisition reduces Enbridge’s dependence on oil infrastructure. This diversification will continue if regulators approve its Line 3 Replacement project in June. If approval is denied, Enbridge’s capital needs will fall by about US$8.8 billion.
In March, the US Federal Energy Regulatory Commission, or FERC, removed certain tax breaks for master-limited partnerships. This made it less profitable for Enbridge to rely on funds from its US units. But Enbridge “does not expect a material consolidated financial impact” from FERC’s ruling.
One analyst set a 2018 price target for Enbridge of $59 a share. This would provide a share price gain of almost 46 per cent. The analyst set a 2019 price target of $72 a share. This implies a jump of four fifths.
Another analyst writes price “recovery potential and an above-average [dividend] payout may entice some accounts.”
Enbridge remains a buy for a long-term share price recovery plus high and growing dividends. But due to considerable risk, buy it only as a modest part of a well-diversified portfolio.
This is an edited version of an article that was originally published for subscribers in the April 2018/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
The MoneyLetter, MPL Communications Inc.
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