Monday, February 11, 2019

Investing using fundamentals - Enbridge

We are adding Enbridge Inc. to our fundamental portfolio. Enbridge Inc (ENB) is one of Canada’s largest pipeline companies. With Line 3 approaching completion this year, the company has a large competitive moat with its enormous infrastructure of pipelines. It owns not only a network of oil and gas pipelines but also Canada’s largest natural gas distribution company. It is splendidly positioned to take advantage of Canada’s 1.3 million barrels/day of anticipated production  increases over the next decade or so, in spite of the current oil patch difficulties.

Recently some less good news has emerged regarding Enbridge, its large debt, in part stemming from the recent take over of Spectra Energy in the Eastern U.S. where it owns a large high-quality net work of natural gas pipelines. Just like Canadian Banks a decade ago, both Enbridge and TransCanada Pipelines (its largest Canadian competitor) have concluded that growth in the current Canadian business climate is constrained. They decided to expand heavily into the U.S.  This combined with Line 3 and many other smaller pipelines set up Enbridge for enormous growth. 2020 dividends are expected to be increased by 10%.   As you may notice on the time-value spreadsheet, the dividend payout is currently 119%. But this is due to the impact of the high debt incurred because of its enormous growth of assets.

Figure 1 Enbridge fundamentals. DCF means discounted cash flow method. Click the image for a better quality view.

Last year, Enbridge committed to selling off at least $3billion of none-core assets to reduce its debt.  The company has followed through and this year sold off even more than $3 billion in non-core assets. Enbridge has build a rather complex corporate structure over the last decade but is now in the process of simplifying it. The result is a significantly improved balance sheet that with the expected increase in revenue and earnings over the coming years should improve its debt load significantly and thus its dividend pay-out ratio.  In spite of the wobbly nature of its earnings graph, Enbridge’s management is very competent and considered one of the highest quality management teams in Canada if not the world. Despite the oil-crash in 2015, earnings over the last 4 years have shown significant growth and I expect a lot more.
With a dividend yield of 6.16% and a potential recouping of the share price within 11 years based on the cumulative dividend estimate, I consider Enbridge a must-own holding for every Canadian stock market investor. There is more risk than I would like to see in a core holding such as Enbridge but it’s potential is hard to deny. Manulife and Power Corp are 'show-me' stocks but Enbridge is a ‘Benefit of Doubt’ stock – for now. We will learn soon enough.  I am building a 4% position in my paper securities portfolio.

As mentioned earlier on this blog and on this post series about fundamental investing, these are my opinions and they do not constitute investment recommendations. Neither do I claim the data above is correct.  These posts are intended to show you ways to invest in order to meet your goals in life. But I nor anyone affiliated with me is liable for any action you undertake as a result of my postings and/or opinions. You are solely responsible for your own actions.

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