2021 Week 6: Enbridge (NYSE: ENB)

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The capital allocation for the week of 02/07/2021 to 02/13/2021 will be used to establish a position in Enbridge (NYSE: ENB).

ENB – Company Profile

Enbridge (ENB) operates as an energy infrastructure company. The company operates through five segments: liquids pipeline, gas transmission and midstream, gas distribution and storage, renewable power generation, and energy services. The bulk of ENB’s operations are in Canada and the United States, where it operates the largest distribution network of liquids pipelines in North America. Its newer renewable power generation operations are located in North America and Europe. Official Site | Wikipedia

Dividend Streak26 years
Yield (TTM)7.21%
Payout Ratio68.78%* (GAAP 348%)
P/OCF (P/E)9.54* (GAAP 44.90)
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* computed using TTM OCF of C$4.71 as of Q3 2020

Financials

Does ENB have the financial means to sustain and raise its dividend going forward?

Over the last 10 years, ENB increased its revenue considerably. Revenues increased from C$15.1 billion in 2010 to C$50 billion in 2019. The major acquisition of Spectra Energy in 2016 was a positive contributor to the revenue growth.

Due to the fact that Enbridge operates an asset-heavy business, it regularly records high amounts of depreciation expenses. However, since this is a non-cash expense, the companies cash flows are significantly higher than reported net earnings. ENB grew operating cash flow (OCF) from C$1.877 billion in 2010 to C$9.398 billion, almost a five fold increase.

ENB determines dividend payouts based on cash flow and more specifically distributable cash flow (DCF). Management has a dividend payout ratio target of 60-70% of DCF. Both OCF/Share and DCF/Share grew over the last 10 years. However, the growth has been a bit volatile as ENB has issues additional shares to finance acquisitions. Most notably the 2016 Spectra Energy takeover was paid for in all-stock, and had a big diluting effect for FI 2017. DCF growth since 2017 has resumed and is expected to continue as ENB brings new projects online.

For first 3 quarters of 2020, ENB reported slight increases in both OCF and DCF compared to the same period of 2019. OCF was C$7.537 billion in 2020 compared to C$7.405 billion in 2019. DCF came in at C$7.231 billion in 2020 compared to C$7.173 billion in 2019. Given the turmoil the energy sector has experienced due to the COVID-19 pandemic and associated decrease in oil demand, these results demonstrate the durability of the company’s business model.

Valuation

Are we paying too much for ENB at the current share price?

Over the last decade, EMB traded at a P/OCF (price to operating cash flow) ratio between a low of 8.9 and a high of 19. (per Finbox) The current P/OCF ratio of 9.54 is close to the bottom of that range and lower than the values for the last 3 years.

The current share price of C$44.91 is 5% above the 50-day moving average and 10% above the 200-day moving average. It is also at about the middle of the 52-week trading range.

Both the P/OCF ratio and the current share price indicate that ENB is currently reasonably priced.

Yield

How does the current dividend yield compare to historical values?

During the last 10 years, ENB had a dividend yield in the range of 2.26% to 8.84%, with a media value of 3.23%. (per GuruFocus) The current TTM dividend yield of 7.21% is more double the historical median value and close to the all time high of 8.84% seen in December 2020.

Additionally, on December 8, 2020 ENB raised its Q1 2021 quarterly dividend payout to C$0.835/share from the previous value of C$0.81/share. This increase pushes the forward looking yield to 7.43%.

Thesis

Why are we adding ENB to the FiveTwenty portfolio?

ENB has a strong track record of growing revenues and operating cash flow. During the COVID-19 pandemic it has demonstrated the durability of its business model in the face of a major disruption to the energy sector. In addition, in recent years the company has shifted it focus to investing in cleaner natural gas, offshore windfarms, renewable natural gas and hydrogen. These investments should position ENB well for the energy transition.

The current payout ratio for ENB is above the 60% max specified in our entry criteria. However, we are choosing to waive that requirement for ENB, because with management target of a 60%-70% payout ratio it would exclude the company from the portfolio for the foreseeable future. On the other hand the current valuation and yield makes it an attractive opportunity to add ENB to the portfolio.

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