Here are three companies that have recently undergone major transformational acquisitions. Two of them are in the business of transporting oil and natural gas through pipelines across Canada and the United States. The other, a waste management company, includes the treatment and disposal of some of that oil field waste.
Enbridge Inc. (TSX—ENB; NYSE—ENB) has completed the stock-for-stock merger of Spectra Energy Corp. with its own business. Houston, Texas-based Spectra is one of North America’s leading pipeline and midstream companies.
The merger makes Enbridge a leading global energy infrastructure stock and the largest in North America, with about $166 billion in enterprise value. The company now has a diverse set of low-risk businesses comprised of a network of crude oil, liquids and natural gas pipelines, a large portfolio of regulated gas distribution utilities and a growing renewable power-generation platform.
Meanwhile, the company’s available cash flow from operations (ACFFO) increased by 10 per cent year over year in 2016. For the year ended Dec. 31, 2016, Enbridge’s ACFFO was $3.7 billion, or $4.08 a share, compared with $3.2 billion, or $3.72 a share, in 2015.
Enbridge recently increased its quarterly dividend by 10 per cent to $0.583 a share.
Enbridge expects the Spectra merger will support its 12 to 14 per cent ACFFO per share compound annual growth target over the 2015-2019 time frame, and will strongly add to its growth outlook beyond that period. Buy for growth and income.
TransCanada a transformed pipeline giant
Last year was a transformational one for TransCanada Corp. (TSX—TRP; NYSE—TRP). The company acquired Columbia Pipeline Group for US$13 billion, the largest business transaction it has undertaken since its merger with Nova in 1998. The acquisition has diversified its regulated natural gas pipeline and storage operations, and given it a strategic position in the Appalachian basin, one of the world’s fastest growing and lowest-cost natural gas production regions.
TransCanada is a leading energy infrastructure company in North America, focusing on pipelines and power generation opportunities.
For the year ended Dec. 31, 2016, TransCanada made $2.1 billion (adjusted), or $2.78 a share, compared with $1.8 billion, or $2.48 a share, in the same period of 2015. The company benefitted from higher income from its U.S. pipelines, a higher allowance for funds used during construction of its rate-regulated projects, an increased contribution from its Mexico pipelines and higher earnings from its natural gas storage assets.
Dividend aristocrat reaches 17th year of increases
With the release of its 2016 results, TransCanada declared a 10.6-per-cent increase in its quarterly dividend to $0.625 a share. This is the seventeenth consecutive year the dividend has been raised.
TransCanada expects its $23-billion near-term capital program to generate significant growth in earnings and cash flow, which management projects will support an annual dividend growth rate at the upper end of an eight to 10-per-cent range through 2020. The company also continues to pursue longer-term growth initiatives that include Keystone XL.
The stock trades at a high but still reasonable 21.4 times the $2.88 a share that TransCanada will probably earn in 2017. The current annual dividend of $2.50 a share yields 4.1 per cent. TransCanada is a buy for growth and income.
Waste management and disposal paying dividends
Like TransCanada, Waste Connections Inc. (TSX—WCN; NYSE—WCN) had a transformational year in 2016. The inclusion of Progressive Waste Solutions into its business let the company drive significant improvements in the quality of revenue and operating performance at Progressive. In fact, these improvements have occurred 12 to 18 months ahead of management’s initial expectations. Consequently, financial results have also exceeded expectations.
Waste Connections is an integrated solid waste services company that provides waste collection, transfer, disposal and recycling services in mostly exclusive and secondary markets in the U.S. and Canada. Through it R360 Environmental Solutions subsidiary, the company provides non-hazardous oilfield waste treatment, recovery and disposal services.
For the year ended Dec. 30, 2016, Waste Connections made US$395.2 million (adjusted), or $2.57 a share, compared with $244.9 million, or $1.98 a share, in the same period of 2015.
Revenue rose 59.5 per cent to $3.4 billion. Most of the increase was due to the Progressive acquisition, which was completed on June 1, 2016. Adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, meanwhile, increased 50.7 per cent to $1.1 billion.
In the final quarter of 2016, Waste Connections increased its quarterly dividend by 24.1 per cent to US$0.18 a share. The company first paid a dividend in 2010, and in each year since it has increased the payout.
The strength of recent financial results, together with the recently-announced acquisition of Groot Industries, an Illinois-based solid waste services company, and continuing improvements in recycled commodity values and oil and gas exploration and production waste activity, positions Waste Connections for another strong year in 2017.
Waste Connection trades at a high 28.2 times the C$4.14 a share that it will probably earn in 2017. While this high multiple may limit near-term price appreciation, we view the stock’s long-term growth potential attractive. Buy for growth and some income.
This is an edited version of an article that was originally published for subscribers in the March 2017/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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