Dividend Achiever: Super Pipeline Enbridge

| About: Enbridge Inc. (ENB)

Earlier this year, Enbridge Inc. (NYSE:ENB) initiated the process to acquire, or merge with, Spectra Energy Corp. (NYSE:SE) to form North America's premier energy infrastructure with C$165 billion in enterprise value.

This merger further strengthen Enbridge's goal of increasing dividends by at least 10% annually. The merger was unanimously approved by both boards of directors and is expected to close in the first quarter of 2017.

Enbridge Summary

Enbridge is an energy transportation and distribution company. The Company operates through five segments:

  • Liquids Pipelines
  • Gas Distribution
  • Gas Pipelines, Processing and Energy Services
  • Sponsored Investments
  • Corporate

The company also operates regulated and non-regulated services as well as managing a number of companies publicly traded. Namely,

  • Enbridge Income Fund (OTC:EBGUF)
  • Enbridge Energy Partners (NYSE:EEP)
  • Enbridge Energy Management (NYSE:EEQ)
  • Midcoast Energy Partners (NYSE:MEP)
  • Spectra Energy Corp. will also bring Spectra Energy Partners, LP (NYSE:SEP) into the fold.

enb-companies

Below is Enbridge by the numbers as of writing.

  • Stock: TSE:ENB, NYSE:ENB
  • Market Cap: C$53.17B
  • P/E: 39.93
  • Dividend Yield: 3.71%
  • Dividend Payout Ratio: 148.25%
  • Technical Trend: Trend Analysis

From a USD market capitalization perspective, Enbridge will nearly double in size after the merger. ENB on the NYSE has a market capitalization of $40B while Spectra is valued at $29B.

Below is the pipeline network for Enbridge highlighting its strength in Canada and its exposure to the US. The next graph highlights the addition to its pipeline network with the acquisition of Spectra Energy.

Click to enlargeSource: Enbridge website Click to enlargeSource: Spectra Energy website

Core Metric #1: Dividend Growth

Enbridge is part of the 10-10 dividend growth club. That means it has increased its dividend for at least 10 consecutive years with a CAGR (Compound Annual Growth Rate) of 10% on average. That's a regular 10% pay raise and it has also confirmed its interest in continuing to grow the dividend by 10% moving forward through 2024. That's 8 years from now. At this price, the yield would double during that time.

Enbridge is also a Dividend Achiever on both the Toronto Stock Exchange (TSE) and the New York Stock Exchange (NYSE). Below are the numbers for the 3, 5 and 10-year CAGR. As you can see, it's pretty consistent which is something we want in companies we invest in for the long term.

  • 3-year average of 18.07%
  • 5-year average of 16.96%
  • 10-year average of 13.59%

Here is a snapshot of the dividend growth from the company's report.

enb-dividend-growth Source: Enbridge website

Core Metric #2: Dividend Payout Ratio

Earnings don't look good for Enbridge when you look at the numbers, and it increased over the past few years. However, the revenue coming from the companies it controls make it complicated. I own Enbridge Income Fund and it pays a really nice dividend and ENB has moved more assets in that entity as well. Below is the EPS average of the past 10 years.

  • 3-year average of 103.29%
  • 5-year average of 89.35%
  • 10-year average of 71.05%

It's clear that the EPS has not kept pace with the dividend growth and yet, Enbridge is confident it can increase the dividend at a 10% rate over the coming years. It would technically not be sustainable as it would bleed the company. However, EPS is just one of the numbers we can look at and as it happens, ACFFO is a better indicator as outlined by Enbridge. The company recently released a new measurement of cash flow, similar to what its American competition uses, known as adjusted cash flow from operations, or ACFFO. ACFFO is important because it looks at how much net cash the company is bringing in, minus any preferred dividends and maintenance capital. Therefore, it is a solid measure of how much cash flow the company has remaining to pay its dividend and to invest in growth projects.

As a side note, REITs have long used FFO or AFFO to highlight the cash available to pay the distribution. The AFFO is favoured over earnings.

Click to enlargeSource: Data retrieved from Enbridge website and financial reports

Core Metric #3: Consecutive Dividend Increases

ENB has increased its dividends for 21 consecutive years. It's only 4 years short of meeting the stringent US Dividend Aristocrats requirements of 25 years. The past 10 years have also shown a consistent 10% growth in dividend.

Investment Philosophy #1: Business Quality

The energy pipeline business is a necessity for businesses and home owners. Natural gas powers many homes in North America and oil needs to be moved around. With the recent purchase of Spectra Energy, Enbridge has positioned itself as the largest pipeline company, giving them more revenue in an oligopoly business.

The pipeline business is not a business where anyone can get in easily. Lots of regulations and capital needed. Just like the railway business, the energy pipeline business is an oligopoly with little disruptive competition.

The business of Enbridge is predictable, consistent and a necessity in today's environment. It therefore ranks high as an investment due to the limited external competitors and disruptors.

Investing Opportunity Score: 42%

Based on my Opportunity Score formula, Enbridge has a score of 42% (the higher the better) for being an investing opportunity. Above 60% is a good range to pay attention on investment timing. Anything around 80% will have a short window of opportunity unless the stock got beaten down.

Enbridge is currently trading high in the 52-week range and has a high P/E which is hurting the overall score. It may be considered overvalued, but with the merger/acquisition of Spectra Energy announced earlier in the year, the stock is probably trading based on future value with investors wanting to get in early. This is a situation that makes it hard to simply look at the numbers and you need to look at what the company would be in the future.

Enbridge is what I would consider a core holding for any portfolio. The price of entry is your choice, but don't underestimate dollar cost averaging and its dividend growth strength.

Disclosure: At the time of writing, I have a position in ENB and ENF. See my portfolio holdings for details.

Disclaimer: Please note that this post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your decision at your own risk - see my full disclaimer for more details.