Oil prices have certainly caused great pain in the energy sector in 2015. With cash flows drying up, dividends are being cut left and right. But there’s one company that is having no problem rewarding shareholders with lucrative distributions: Enbridge Inc. (NYSE:ENB).
Enbridge is an Alberta, Ontario-based midstream energy transportation and distribution company that transports crude oil and liquids across the United States and Canada. The company is also involved in natural gas transmission and various midstream businesses. Founded in 1949, it is one of the most recognized and respected companies in the North American energy sector.
Enbridge owns and operates its own natural gas distribution system in Canada, but also provides gas distribution services in Quebec, Ontario, New Brunswick, and the State of New York. Its business is broken down into five segments: liquids pipelines; gas distribution; gas pipelines, processing and energy services; sponsored investments, and corporate.
Due to its unique business structure, where revenue is generated through a toll house approach to energy transportation, and prudent financial and strategic management, Enbridge has not only survived the recent downtown in energy prices but is in fact thriving. (Source: Enbridge, last accessed August 19, 2015.)
Enbridge’s market cap is $47.5 billion, and currently pays out an average dividend yield of 3.44%. The company reported its second-quarter financial results on July 31st, posting adjusted earnings of CDN$505 million, or CDN$0.60 per share, and cash from available operations of CDN$808 million, or CDN$0.96 per share. (Source: Enbridge, last accessed August 19, 2015.) The increase in adjusted earnings was achieved across the company’s various businesses, which reflects the success of Enbridge’s asset base and the successful execution of the company’s growth capital program.
Enbridge in fact predicts its earnings will grow by 10% to 12% annually through 2018. Furthermore, the company recently issued a new measure of cash flow growth which it calls, “adjusted cash flow from operations” (ACFFO). It specifically examines how much money the company generates (in contrast to earnings, which often includes lots of non-cash items), then subtracts maintenance costs to produce a better idea of cash remaining to pay dividends or fund growth strategies. Sounds fair for potential shareholders, right? According to Enbridge, ACFFO is projected to grow by a robust 18%, compounded annually through to 2018. This is well above the 10% to 12% projected growth rate for earnings.
Where will this astounding growth come from in an old and established multi-billion dollar company? After all, Enbridge is no startup.
It’s simple. Enbridge has a CDN$44.0 billion capital growth program taking place between now and 2018. (Source: Enbridge, last accessed August 19, 2015.) And I’m not talking about theoretical plans on the backburner here. This is a well-thought-out and organized plan, with CDN$34.0 billion of the capital program already both commercially and politically secured, and CDN$10.0 billion of that already in service.
Since the end of 2014, Enbridge has completed approximately CDN$3.0 billion of projects and is on track to complete another CDN$5.0 billion by the end of 2015. (Source: Enbridge, last accessed August 19, 2015.) The company evidently knows that in order to grow, you have to invest capital.
But that’s not all.
The growth program is not only secured, but Enbridge’s successful financial optimization strategy means that funding has also been identified and allocated. What this essentially means is that through a clever process of reshuffling assets, Enbridge will be able to fund its capital growth program while minimizing any potential losses.
The process is actually quite simple: Enbridge will be “dropping-down” (i.e. selling) assets to its subsidiary companies. The latest example of this was the CDN$30.0 billion worth of mainline and oil sands assets moved downward to its Enbridge Income Fund subsidiary. What then happens is that Enbridge as the parent company receives dividend-paying shares in return for the assets, along with management fees, and claim to one-quarter of Enbridge Income Fund’s cash flow above CDN$1.295 per share.
The result of this restructuring move is that Enbridge has offset potential losses from selling these assets, while earning two percent on top of it all. An added bonus is that Enbridge Income Fund is now responsible for financially supporting the capital growth program for those dropped-down Enbridge assets, which in practice means that Enbridge benefits from capital growth while avoiding having to issue new stocks and dilute existing shareholders’ share value.
But how do financial experts feel about investing in Enbridge? And how well will its stock perform? These are the important questions for anyone looking for a long-term dividend-paying investment.
Wall Street analysts are betting on Enbridge posting earnings per share of $0.27 in the third quarter. (Source: Equities Focus, last accessed August 19, 2015.) Those firms advocating for a sell have a short-term price target of $37.291 on the equity, which is a weighted average of three analysts who gave their opinions. (Source: American Trade Journal, last accessed August 19, 2015.) The most optimistic of the three predicts Enbridge stock rising to $44.16 by the end of 2015, while the most conservative sees the company’s 52-week average falling to $31.40.
With highly certain double-digit returns, a very reasonable valuation, low stock volatility, and a growing dividend, Enbridge is set to perform well this year and in coming years. Add to the mix a well-run strategic plan for capital growth, and you have the makings of a solid choice for your long-term dividend-paying investment.