Canadian Stocks

Should You Buy Enbridge Stock, a 25 Year Dividend Aristocrat?

Enbridge Stock is a member of the Canadian Dividend Aristocrats index and has not only paid dividends consecutively for the last 25 years, but also grown them each year. The company has a prestigious record of paying dividends since 1953 and therefore a remarkable 67 year history of dividend payments.

Management last raised its dividend from $2.95 per share in 2019 to an estimated $3.24 per share in 2020; which represents a 10% growth.

Canadian Dividend Aristocrats, as measured by the iShares S&P TSX Canadian Dividend Aristocrats ETF with ticker symbol CDZ are those that have not only paid dividends for at least 5 consecutive years, but also grown them every year.

In the case of the S&P 500 Dividend Aristocrats index in the US, they need to raise dividends for a minimum 25 years. Thus, the Canadian Dividend Aristocrats requirements are a little more lenient than their counterparts in the United States.

In this article, we will review Enbridge’s 4th Quarter 2019 financial results, business synopsis, dividend growth history, stock valuation and long term performance versus the S&P TSX and other pipeline companies.

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

Enbridge operates the world’s longest and most complex crude oil and natural gas liquids transportation system moving approximately 25% of all North American crude each year. Enbridge connects key oil supply basins to the most important crude refining centers in America including the US Midwest, Gulf Coast and Eastern Canada.

The company’s natural gas pipelines also connect important supply basins to some of the largest North American cities including New York, Chicago, Boston, Toronto, Vancouver and Seattle. As a matter of fact, according to its 2020 Investor Presentation, Enbridge transports around 20% of all natural gas consumed in North America.

Enbridge North America's Energy Infrastructure Giant

The 3rd largest business is natural gas supply to 3.7 million customers in Ontario, Canada.

Some of the reasons we like Enbridge Stock include its low risk business model operating a regulated utility, investment grade customers and minimal commodity price exposure.

Contracts in natural gas and crude oil transmission are rarely traced back to commodity prices. Instead, they are billed on a fixed-fee basis on long term contracts in excess of 10 years.

Therefore, if Oil prices collapse, Enbridge’s revenues will not be affected as its contracts are not linked to the performance of commodity prices.

Attached is a screenshot showing the company’s 3 main business lines and % of EBITDA (Earnings Before Interest & Taxes, Depreciation and Amortization) they each generate.

Enbridge Stock 3 Lines of Business

Enbridge’s crude oil and liquids pipeline transmission business brings in about 50% of EBITDA and delivers over 3 million barrels per day of crude oil and liquids over Mainline and Express pipelines. The company’s pipelines also connect Canadian oil sands in Alberta to US Gulf Coast which is the oil capital of America.

30% of EBITDA is generated from its natural gas transmission business which has more than 192,000 miles of pipelines flowing across North America and the Gulf of Mexico. These revenues have no direct commodity exposure to the underlying price of natural gas as well as minimal volume exposure.

Another 15% is generated from the company’s natural gas utility business in the province of Ontario, Canada. With over 3.7 million customers and annual regulated price increases with inflation, this is a great and profitable cash flow generating business.

As a matter of fact, according to the screenshot above from the company’s Oct 2019 Investor Presentation, it expects to benefit from Ontario’s population growth forecast from 14 million people in 2018 to 18.5 million by 2040.

Revenue Analysis and Share Buybacks

For full year 2019, Enbridge generated $CAD 50.069 billion in revenues and earned an operating income of $8.26 billion, implying a 16.5% operating profit margin. Revenue growth year over year was 8% as compared to 2018’s operating revenues of $46.378 billion.

Over the last decade, Enbridge has grown its revenues from $USD 21.52 billion in 2010 to $USD 46.378 billion in 2019. This represents a healthy compounded annual growth rate (CAGR) of 8%.

Trading on both the New York Stock Exchange and the Toronto Stock Exchange, Enbridge has a $101.2 billion market capitalization and pays a handsome 6.5% dividend yield.  This yield is 470 basis points higher than the dividend yield paid by the S&P 500 which stands at 1.8%.

Enbridge 2019 EBITDA

For full year 2019, Enbridge generated $13.271 billion in Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA). This was a 3.3% growth over 2018’s $12.849 billion.

The largest earnings generating business is crude oil and liquid pipelines bringing in $7.041 billion for 2019, followed by Natural Gas Transmission and Midstream at $3.868 billion. Gas distribution and storage is the 3rd largest line of business generating $1.819 billion in EBIDTA for 2019.

During the 1st quarter of 2017, Enbridge acquired Spectra Energy through a merger to create a $126 billion global energy infrastructure giant. The deal cost $USD 28 billion and Enbridge took on a gigantic debt load of $22 billion owed by Spectra Energy.

As a result, investors were very concerned about the company’s high debt load and its ability to survive as a going-concern over the long term.

To address this issue, management took an initiative to monetize and sell non-care assets to the tune of $8 billion. The company’s Consolidated Debt to EBITDA dropped from a high of 6 times in 2016 to as low as 4.3 expected in 2021.

Attached chart shows which assets the company has told in order to pay off its long term debt, and hence increase earnings per share.

Enbridge Asset Sales

Growth Outlook

For full year 2019, Enbridge reported GAAP (Generally Accepted Accounting Principles) earnings of $CAD 5.322 billion or $2.64 per share, compared with $2.515 billion or $1.46 per share in 2018. Distributed Cash Flow for 2019 came in at $9.224 billion, a 21% growth over 2018 when it came in at $7.618 billion.

Al Monaco, President and CEO of Enbridge quotes, “2019 was a successful year for Enbridge. Our low risk pipeline-utility model continued to deliver strong financial results and we advanced our strategic priorities on many fronts.

Each of our core businesses delivered solid results in 2019 that translated into full-year DCF per share at the top-end of our guidance range.

The Liquids Mainline System achieved record annual throughput, our gas pipelines were highly utilized, and we’re capturing synergies through the amalgamation of our Ontario Utility businesses.”

He adds, “We placed $9 billion of new projects into service, including the Canadian segment of the Line 3 Replacement. Our focus on optimizing our base business and executing on our secured growth program continues to drive highly predictable and growing cash flows, which resulted in exceptional annual dividend growth for our shareholders of 10% in 2019 and 9.8% in 2020.”

Management expects the $7 billion of Capital projects put in to use will allow the company to generate Distributed Cash Flow (DCF) growth in to 2020. The 3 main projects going live include the Line 3 Replacement in Canada with cost a whopping $5 billion.

Line 3 is a 1097 mile pipeline built in the 1960s which transports crude oil and liquids from Edmonton, Alberta to Superior, Wisconsin. More details on the Line 3 Replacement project can be found here.

In its 4Q, 2019 earnings, management gives guidance for 2020 including a distributed cash flow (DCF) of between $4.50 to $4.80 per share and between 5% to 7% DCF/share growth.

Dividend Growth History

Enbridge is a Canadian Dividend Aristocrat Stock having paid dividends since 1953 and grown them every year for the last 24 years (since 1996). Enbridge has grown its annual dividends from $0.25 per share in 1996 to $3.24 as of 2020. This represents a compounded annual growth rate (CAGR) of almost 11%, which is very impressive.

Attached chart shows Enbridge Stock’s steep uptrend in dividend growth over the last 2 decades.

Chart below also shows the year over year % growth in Enbridge’s dividend. Over the last 5 years, the company has grown its dividends in the low double-digits range. What is even more impressive is during the great financial crisis of 2008, management grew its dividend in the mid single digits range from 5% to 7%.

Investors should remember during this time, the price of Crude Oil crashed to as low as $35 from as high as $147 in June of 2008.

Measuring the Dividend Payout Ratio

Lets calculate the the dividend payout ratio for Enbridge Stock. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from its daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In 2019, Enbridge generated $9.398 billion in cash flows from operations and spent $5.492 billion in capital expenditures. What is the free cash flow?

Free Cash Flow = Cash from Operations – Capital Expenditures

Free Cash Flow = $9.398 billion – $5.492 billion

FCF = $3.906 billion

For fiscal 2019, Enbridge paid out a total $6.356 billion in dividends. So what is the dividend payout ratio?

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

Dividend Payout Ratio = $6.356 billion / $3.906

DPR = 162%

A dividend payout ratio of 162% means the company is not able to cover its dividends fully from its normal business activities minus capital expenditures. Instead, it has to issue debt or borrow money to cover its dividend, which in the long term is risky.

Stock Valuation and Long Term Performance

Enbridge Stock is loved by income oriented investors due to its high 6.5% dividend yield, as well as a 15% dividend growth rate annualized over the last 5 years. What’s not to like?! As a result, investors are paying up for owning this stock as it currently trades at 18.9 times forward earnings.

Analysts expect Enbridge to earn $2.65 per share in 2010. The current Enbridge Stock Price is $49.96 on the Toronto Stock Exchange. Dividing $49.96 in to $2.65 gives us an 18.9 times earnings multiple.

Over the last decade,  Enbridge Stock has gained 141% starting from January 2010. It has handily out performed the Toronto Stock Exchange which has gained just 38.45% during this period.

Enbridge Stock 10 Years Performance

Executive Summary

Here is what we like and don’t like about Enbridge Stock.

Likes

  • Market dominating position transporting 25% of all Crude oil in North America, 20% of Natural gas and a steady Utilities business in Ontario.
  • Low-risk business model and not exposed to violent commodity prices including oil and natural gas.
  • Strong management and 24 year history of consistent growing dividend payments.
  • Succulent 6.5% dividend yield which is a gift to most retired and income oriented investors.
  • Rewarding shareholders with a 15% compounded annual growth rate (CAGR) in its dividend over the last 5 years.

Dislikes

  • High debt load incurred as a result of Spectra Energy acquisition to the tune of $22 billion.
  • Dividend payout ratio of 162% that is not sustainable in the long run. The company has to cut back on capital expenditures to generate positive organic free cash flow.
Market Capitalization $CAD 101.2 Billion
Dividend Yield 6.5%
Forward PE Ratio 18.9 times Forward Earnings
Dividend Growth (5 Year Avg.) 15%
Dividend Payout Ratio (2020 Est.) 162%
EPS Growth (5 Year Avg.) 14.8%
2019 Revenues $50.069 Billion
Gross Margin 37%
Net Margin 16.5%

Useful Media

Below is an educational video from Enbridge Corporate showing how the company’s pipelines move over 2 million barrels of crude oil products across North America every day.

If not for these pipelines, it would take 6800 tanker trucks to transport this oil every day. This fact alone makes pipelines one of the safest, efficient and environmentally responsible methods of transportation in the world.

Enbridge Stock Ex Dividend Dates

Quarter  Dividend Per Share Payment Date Record Date
Q4 2019  $                          0.7380 Dec 1st, 2019 Nov 15th, 2019
Q1 2020  $                          0.8100 March 1st, 2020 Feb 14th, 2020
Q2 2020  TBA June 1st, 2020 May 15th, 2020
Q3 2020  TBA Sep 1st, 2020 Aug 14th, 2020
Q4 2020  TBA Dec 1st, 2020 Nov 13th, 2020

Enbridge Stock Price

To look up the current Enbridge Stock Price, head on over to the company’s Investor Relations website and click on “Stock Price Lookup.”

 

 

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