Please consider publishing your thoughts on Enbridge Inc., particularly the safety and growth prospects for the dividend. Those of us who recall pipeline company Kinder Morgan Inc.’s 75-per-cent dividend reduction in 2015 and, more recently, Algonquin Power & Utilities Corp.’s 40-per-cent haircut earlier this year are getting a tad antsy.
Evidently, you’re not the only investor who is nervous about Enbridge ENB-T. In the past 16 months, the pipeline operator’s shares have lost more than one-quarter of their value as dividend stocks of all kinds have been hammered by surging interest rates and fears of slowing economic growth. Enbridge’s stock, which closed Friday at $43.63 in Toronto, is now languishing about 34 per cent below its record high of more than $66, reached in 2015.
As Enbridge’s shares have slumped, its dividend yield – which moves in the opposite direction to the price – has climbed to more than 8 per cent. The yield has also gotten a boost from annual increases in the dividend, which has nearly tripled over the past decade.
Given Enbridge’s outsized yield, it’s reasonable to ask: Is the dividend safe? Or will Enbridge meet the same fate as Algonquin AQN-T, Kinder Morgan KMI-N and other former dividend-growth darlings whose rich payouts were ultimately unsustainable?
The short answer is: I don’t think you need to lose any sleep.
One reason for the recent weakness in Enbridge’s stock price is its agreement in September to acquire gas utilities in five U.S. states from U.S-based Dominion Energy Inc. D-N for US$14-billion. To help finance the acquisition, which was done at an attractive price of about 16.5 times the utilities’ earnings, Enbridge issued $4.6-billion of shares to a syndicate of underwriters in what is known as a bought deal.
However, to sell such a large chunk of stock amid less-than-favourable market conditions, the new shares were priced at $44.70 – a discount of more than 7 per cent to Enbridge’s closing price before the acquisition was announced.
Cory O’Krainetz, an analyst with Odlum Brown, called the bought deal price “disappointing.” But he said the acquisition, which will nearly double Enbridge’s lower-risk utilities business and create new avenues for growth, was “an opportunity Enbridge couldn’t refuse and … should be value accretive to shareholders. We expect Enbridge shares to trade at or below the equity offer price over the near term, but we see significant upside over the long term.”
Mr. O’Krainetz was right about Enbridge trading below the bought deal price, as the market has to absorb nearly 103 million new shares. But he’s not the only analyst who sees the gas utility acquisitions as being a good long-term fit for Calgary-based Enbridge.
The deal, which includes utilities in Ohio, North Carolina, Utah, Wyoming and Idaho, is “a unique opportunity given its scale and attractive valuation,” Robert Catellier, an analyst with CIBC World Markets, said in a note to clients. By reducing the weighting of Enbridge’s liquids pipelines business to about 50 per cent from 57 per cent, and increasing its utilities weighting to 22 per cent from 12 per cent, the acquisition accelerates Enbridge’s transition to lower-carbon energy and lowers its business risk thanks to the increase in its regulated earnings.
While Mr. Catellier acknowledged that Enbridge still faces risks related to securing the remaining funding for the transaction, he said the opportunity to invest about $1.7-billion annually in the rate base of the U.S. utilities will enhance Enbridge’s ability to achieve its target of mid-single-digit growth in EBITDA (earnings before interest, taxes, depreciation and amortization) over the next several years. Rate base is the value of assets on which a utility is permitted to earn a regulated rate of return, so an increasing rate base leads to higher earnings.
Enbridge’s growing earnings, in turn, should support future dividend increases, while preserving the company’s investment-grade credit ratings and keeping its dividend payout ratio within its target range of 60 per cent to 70 per cent of distributable cash flow per share, the company said. (Enbridge defines DCF as operating cash flow, minus preferred share dividends, maintenance capital expenditures and other unusual and non-operating items.)
Still, investors should temper their expectations for dividend growth. Until a few years ago, Enbridge was hiking its payout at double-digit percentage rates annually, but future raises will likely be in the low single digits. Mr. Catellier projects that the annual dividend will increase by 3.1 per cent to $3.66 for 2024, which is in line with the 3.2-per-cent raise that Enbridge announced last November.
So, not only does Enbridge’s dividend appear to be safe, but it will almost certainly continue to grow, albeit at a modest pace. Hopefully, you’re feeling a little less antsy now.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
John Heinzl