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Why I’m buying more of this pipeline giant



John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

Well, it didn't take long for my first dividend increase of 2017 to arrive.

On Jan. 5, Enbridge Inc. – a stock I own personally and in my Strategy Lab model dividend portfolio – boosted its dividend by 10 per cent to 58.3 cents a quarter, or about $2.33 annually. Based on Tuesday's closing price of $56.66, Enbridge now yields 4.1 per cent. I consider that very attractive given that Enbridge's dividend will almost certainly continue to grow for years.

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Was I surprised by the increase? Not at all.

In my recent 2017 outlook column, I wrote that Enbridge planned to hike its dividend in January and that a second increase would follow after the closing of its $37-billion acquisition of Houston-based Spectra Energy Corp.

Enbridge has said the two increases together will boost the dividend by about 15 per cent in 2017 – the 22nd consecutive year that the pipeline operator has raised its dividend.

Steady dividend growth is the foundation of my investing strategy, and few companies are as reliable as Enbridge in that regard. In announcing the latest hike, the company cited the strength of its existing business, the impact of $2-billion of growth projects that came into service in 2016 and expectations of further investments coming on stream in 2017 (exclusive of the Spectra deal, which is expected to close in the first quarter).

As Enbridge chief executive Al Monaco said in a statement: "Delivering consistent and dependable dividend growth is core to our shareholder value proposition and a direct reflection of our low-risk business model, which performs well in all market conditions."

The acquisition of Spectra – whose natural gas transmission, storage and distribution assets complement Enbridge's liquids pipeline business – will create North America's largest energy infrastructure company and set the stage for further dividend growth.

Following the expected 15-per-cent increase in 2017, Enbridge aims to raise its dividend by 10 per cent to 12 per cent annually from 2018 through 2024. Dividends aren't official until the board approves them, but even if Enbridge delivers on the low end of that forecast, by 2024 its dividend will have more than doubled from its current level to about $1.19 a quarter or $4.76 annually.

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Analysts say Enbridge's dividend growth projection is realistic.

RBC Dominion Securities analyst Robert Kwan called Enbridge "one of the 'go to' large cap infrastructure stocks in North America." In a December note published after Enbridge and Spectra shareholders voted in favour of the deal, which still requires regulatory approval, Mr. Kwan raised his price target on Enbridge shares to $69 from $64. He also noted that Enbridge's dividend is well covered, with an estimated ratio of adjusted cash flow from operations (ACFFO) to dividends of about 1.7 to 1.8 for 2017 through 2019.

"Due to the portfolio of mostly liquids pipeline projects under construction, we expect that Enbridge will be able to grow ACFFO/share in at least the 12- to 14-per-cent range out to 2019 underpinning 10- to 12-per-cent annual dividend growth over the same time frame," he said. Looking further ahead, "we believe that the proposed Spectra transaction puts the company on a more solid footing to extend a similar level of dividend growth out to 2024."

Is Enbridge a slam dunk? No. Opposition to pipelines, the potential for higher interest rates and uncertainties regarding identifying and building new projects are among the risks facing the company. But I've held Enbridge for years personally and it's been in my Strategy Lab model dividend portfolio since inception on Sept. 13, 2012, and I'm confident that the company will continue to execute on its growth plans – even if it faces hiccups here and there.

That's why, with Enbridge aiming to continue raising its dividend over the next eight years – and perhaps longer – I've decided to increase my position. I've got just enough cash in my Strategy Lab portfolio to purchase another 10 Enbridge shares, bringing my total to 140.

With one 2017 dividend increase from Enbridge under my belt, I'm now looking forward to dividend hike No. 2.

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