Tuesday, April 10, 2018

Is Enbridge a Buy For Income?

People are really nervous about buying this company as an income play and long term dividend growth story. All that is left to squeeze out is that dividend. I believe the nervousness is warranted.

Enbridge has been a favourite energy infrastructure play in Canada for decades. It is a staple among dividend investors and is currently sitting on the 'Dogs of the TSE list.

The management team has decided to start selling assets which will result in a smaller company and dilute current shareholders.

When a company this size decides to sell assets it loses that revenue at the same time paying out dividends. Not a good long term solution.

If it decides to cut the dividend while getting smaller, investors will flee and the stock will get punished.

It is also having a hard time getting approval to build it's Line 3 pipeline. That's 32 million gallons of Canadian crude per day getting delayed on the way to market. It's not a new line it's just a replacement.

Enbridge is carrying 61 billion dollars in long term debt. OUCH!

It trades at 24X forward earnings. That's a premium to the peer average of 20X.

It has a low ROE of 7.8%

The pay out ratio is 162%

Dividend Yield = 6.7%

The company is under extreme pressure to bring it's debt under control by activist investors and rating agencies. The shares have lost 23% in the last 52 weeks. It has really turned into a dog both technically and fundamentally.

It plans on selling up to 8 billion dollars in assets in 2018.

They have further announced a commitment to grow their dividend by at least 10% until 2021. This is great news for income investors but I'm not sure if it's the healthy thing for management to commit to.

Something is wrong here and doesn't pass the smell test as an investment. I'm holding my small 200 share position.

Recent Analyst Opinions

"Added the stock to their portfolio a few months ago and so far has underwhelmed and under performed expectations. Assets that move 2/3 of the oil out of Western Canada can not be replaced anytime soon. He believes the Line 3 expansion will be approved by the PUC of Minnesota by Q2 2018. Over $10 billion of Spectra assets up for sale. Yields 7%." - Brian Madden, Goodreid Investment 4 April 2018

"There is a lot of debt but pretty stable assets. They have pipelines that are hard to build in Canada. Over leveraged but manageable. US and International investors are fleeing the company due to the dumb things are government has announced." - Alex Ruus, Arrow Capital Management 29 March 2018

"They attempted to raise $1.5 billion to help fund growth but only managed $750 million. Selling assets to pay debt at the same time pay an almost 7% dividend. Be careful." - John O'Connell, CEO Davis Rea 2 April 2018

"Solid company going forward, likes it's diversification across the continent. Dividend is solid and I have a $52 target." - Jamie Carrasco, Scotiabank 3 April 2018

My Final Takeaway

As a dog of the TSE I buy the stock and did at the start of the year. It has dropped significantly for me.

I love the dividend and the announcement to increase it for the next 3 years.

I may buy more on continued weakness and I believe they will turn the ship around but may take some time. As long term income investors we always keep that in mind.

Recommended Reading:

Del Vicario on Growth Stocks

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