Political and environmental opposition to new oil pipelines prompted this stock to acquire a big U.S. pipeline firm earlier this year. Although an acquisition of this size adds risk, the new business owns regulated assets with predictable cash flows.
The company plans to use the extra cash flow from the business to fuel its ambitious plans to raise the dividend. But the payout is already taking an increasingly big bite out of its cash flow.
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ENBRIDGE INC. (Toronto symbol ENB; www.enbridge.com) operates pipelines that pump oil and natural gas from Western Canada to eastern Canada and the U.S. It also distributes gas to consumers in Ontario, Quebec, New Brunswick and New York State.
In February 2017, the company completed its all-stock purchase of Spectra Energy. That firm operates crude oil and natural gas pipelines in the U.S. and Canada. The company also owns oil and gas storage facilities.
Thanks to the extra cash flow from Spectra, Enbridge plans to raise its quarterly dividend by 10.0%. Starting with the March 2018 payment, investors will receive $0.671 a share, up from $0.61. The new annual rate of $2.684 yields a high 5.4%.
The company, in fact, plans to raise the annual dividend rate by 10% each year through 2020 (its dividend has increased an average of 19.1% annually over the last 5 years). However, that’s a drop from its previous plan to increase that rate by 10% to 12% each year from 2018 to 2024.
Starting with the March 2018 payment, Enbridge investors will receive a quarterly dividend of $0.671 a share, up 10.0% from $0.61. The new annual rate of $2.684 yields a high 5.5%.
At that rate, the dividend payout represents roughly 62% of Enbridge’s projected 2018 cash flow per share of $4.30. However, that estimate excludes certain costs such the regular maintenance of the company’s pipelines. If you factor in those costs, the payout ratio would be a less sustainable 105% of Enbridge’s cash flow.
Energy stocks: Earnings jumped 44% in the latest quarter
Enbridge also announced that it will spend $22 billion between 2018 and 2020 on new projects and upgrades to its existing operations. That will help the company concentrate on its rate-regulated utilities. It will sell $10 billion worth of its less-important, unregulated businesses; its goal is to conclude $3 billion in sales by the end of 2018.
For example, it agreed to sell St. Lawrence Gas Company for $70.0 million U.S. That firm operates natural gas pipelines and distributes gas in northern New York State.
To help pay for its capital spending, Enbridge will also sell $1.5 billion worth of new common shares (at $44.84 a share). That will increase the total number of shares outstanding by about 2%.
New projects should push up the company’s projected cash flow per share, from $3.75 in 2017 to between $4.15 and $4.45 for 2018. The stock trades at 11.5 times the midpoint of the 2018 range.
If you exclude costs to integrate new operations and other unusual items, Enbridge’s earnings in the quarter ended September 30, 2017, jumped 44.6%, to $632 million from $437 million a year earlier. The company sold shares to help pay for the acquisition. Due to the extra shares outstanding, earnings per share fell 17.0%, to $0.39 from $0.47.
Revenue in the quarter rose 8.7%, to $9.2 billion from $8.5 billion. Oil volumes on its pipelines rose 6%, offsetting a 1% decline in gas volumes.
The stock is down 12% in the past year, mostly due to uncertainty over the approvals the company needs for new pipeline projects. Still, shares trade at a somewhat high 25.1 times the $2.00 a share Enbridge will likely earn in 2017.
Recommendation in The Successful Investor: Enbridge Inc. is still a hold.
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