Contents
Summary
- On December 8th, Enbridge Inc. held its Investor Day at which time management re-affirmed its 5-7% average long-term annual distributable cash flow (DCF) per share growth outlook.
- FY2020 DCF per share is expected to be near the mid-point of the $4.50 - $4.80 guidance range and FY2021 guidance calls for $4.70 - $5.00 DCF per share, and earnings before interest, taxes, depreciation and amortization (EBITDA) of $13.9 - $14.3B.
- ENB declared its 26th consecutive annual common share dividend increase, raising it by 3% to $0.835/quarter (to $3.34 annually), effective March 1, 2021.
- Execution of the $16B secured growth capital program continues to advance which is expected to generate ~$2B of expected EBITDA growth from 2021 - 2023.
Introduction
In this November 2nd article I disclosed the purchase of shares in two high quality companies by one of the young investors I am helping to build an investment portfolio.
For a young investor with a long-term investment time horizon, I would be inclined to seek out 'growth' companies in which to invest. The challenge I have, however, is that we are not experiencing a rational investment environment. High quality growth companies are insanely valued and I think many of the companies which have been caught up in what can be deemed to be an environment of 'irrational exuberance', are ripe for a retracement to more sane valuations. When this will happen is anybody's guess but I am not prepared to participate in this 'market casino'.
Given this, we are seeking to invest in high quality companies with a demonstrated ability to generate profits, free cash flow, and to reward investors with a growing stream of dividend income all the while paying close attention to risk. Keeping this in mind, we have decided to acquire shares in Enbridge Inc. (ENB.TO) for our daughter's boyfriend; our daughter already has exposure to ENB.
Valuation
On December 8th, ENB held its Investor Day at which time senior management provided an update on its strategic priorities; the release details and Investor Presentation can be accessed here.
Management has re-affirmed its 5-7% average long-term annual DCF per share growth outlook and expects FY2020 DCF per share to be near the mid-point of the $4.50 - $4.80 guidance range; FY2021 guidance calls for DCF per share of $4.70 - $5.00 or CAD $9.6B - $10B. Using the midpoint ($4.85) of this guidance range we get a ~3.2% increase from the 2020 midpoint ($4.65).
Looking at ENB's CEO's comments found in the December 8, 2020 Press Release we see that the annual DCF per share is a key metric management uses to run its business; we also see this key metric throughout ENB's Q3 Earnings Presentation. As a result, if we compare the $42.89/share purchase price of the shares acquired today to the $4.85 midpoint of the 2021 DCF guidance range we get a value of ~8.84 P/DCF.
If we rely solely on GAAP Earnings to analyze ENB, we would be inclined to think that ENB is grossly overvalued. Looking at ENB's Q3 10-Q, we see only $0.60 of diluted EPS for the first 9 months of the current fiscal year. On the basis of a $42.89 share price and projected annual diluted EPS of ~$1, we would get a forward PE closer to ~$43. We need to delve further into the numbers, however, where we will find that YTD diluted EPS includes a YTD $2.351B impairment of equity investments charge. Looking at the notes to the financial statements for each quarter of the current fiscal year we see that this sizable impairment charge is attributable to certain unusual, infrequent or other non-operating factors. More details on these non-cash impairment charges can be found by looking at Note 9 within the each 10-Q report released in 2020 which can be accessed here.
Dividend
ENB has declared its 26th consecutive annual common share dividend increase, raising it by 3% to $0.835/quarter ($3.34 annually), effective March 1, 2021. Based on guidance management has provided we can expect the dividend to be covered 1.45 times by DCF ($4.85/$3.34) and a ~68% dividend payout ratio; these metrics provide a generous margin of safety.
On the basis on a $42.89/share purchase price, the new quarterly dividend provides this young investor with a ~7.8% dividend yield.
Credit Risk
I draw to your attention the various pages within the 2020 Investor Day presentation where management stresses the importance of its capital structure with the preservation of the company's financial strength being a top priority (for example, see page 18).
Looking at page 25 of 69 we see ENB's current credit and ESG (environmental, social and corporate governance) ratings; the credit ratings are investment grade. I encourage you to review these tables which provide credit rating codes and classes and rating tier definitions.
Shareholders face far greater risk than bondholders so, depending on your personal circumstances, it might be extremely wise to retrict equity investments to investment grade rated companies. I strongly suspect many unsophisticated investors in a precarious financial position are throwing caution to the wind and are investing in companies without fully comprehending the degree of risk they are assuming. I can't imagine everyone who has invested in Tesla's (TSLA), for example, comprehends the risk they are making by acquiring shares in this company. TSLA's long-term debt was upgraded to B2 from B3 in July 2020 and even after this rating upgrade, TSLA is still highly speculative. Then you have other companies such as:
- Kandi Technologies Group, Inc. (KNDI),
- Nikola Corporation (NKLA),
- Loop Industries, Inc. (LOOP),
- GrowGeneration Corp. (GRWG)
- Facedrive Inc. (FDVRF)
- Ideanomics, Inc. (IDEX)
which belong in the dumpster yet some of these companies see average trading volumes in the tens of millions of shares and totally ridiculous valuations (some of these companies have not turned a profit and...even more alarming...have generated negligible revenue or NO revenue!).
Final Thoughts
ENB is certainly not a company which will experience 'high octane' growth. It does, however, have a compelling value proposition and is the type of company which should allow investors to 'sleep well'.
Source: ENB - December 8 2020 Investor Day Presentation
In my opinion, ENB is reasonably valued and the attractive dividend yield (a dividend that is well covered by DCF) is adequate reward for investors who are confident management is on the right path toward maximizing value by enhancing existing asset returns, completing secured projects and prioritizing low-intensity, utility growth.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am ENB.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
