Enbridge stock (symbol: ENB) is one of my core positions in my Canadian dividend portfolio, and it is one of the core holdings for many income-focused investors in Canada. Enbridge was a dividend darling stock for many years, but it seems like struggling to find its direction for last few years.
About ENB
Enbridge is one of the largest energy infrastructure companies in North America, and it owns and operates the world’s longest crude oil and liquids pipeline network, Canada’s largest gas distribution system and also it has some other assets.
According to the 2017 ENB annual report, 96% of the company’s earnings are underpinned by low-risk, long-term contracts with strong, creditworthy customers. Thus, their cash-flow is stable. And, it has increased its dividend for 23 consistent years and expects to grow by 10% per year through 2020.
It seems like everything looks good with the company- in my view and business fundamental is very strong; however, Enbridge share price is under pressure for last couple years.
Its value fell from $65.75 in April 2015 to less than $38 and then recovered a bit. It is now trading around $42.35 as of this writing. It is a big decline for a blue-chip company like this.
As I mentioned above, ENB is one of my top 10 holdings as of June 2018. I really like to know what is going on with the company, so I started to dig deeper and find some possible reasons. In this post, I am going to share with you the information I gathered and some reasons for the low share price.
Important
Before you go further, I would like to tell an important truth about me and about this post. I am not a financial professional and all the numbers and other details are gathered from various sources, including Enbridge annual and quarterly reports, morningstart.ca, and some other financial websites. And, I can’t guarantee the accuracy of the information. As I always say, please do your own research or discuss with a financial professional before making any decisions.
My Enbridge holdings
It is one of the earliest stocks in my portfolio. I initiated a small position in early 2012 for around $39, and then slowly built to my core holding.
If I purchased a stock, I rarely sell them. But on few different occasions, I sold small positions of ENB shares and recorded some profits. Later, I purchased them back at lower.
As of this writing, ENB pays $2.68 per share dividend annually. Currently, I have 260 shares in my portfolio.
With current rate, I receive $696.80 dividend annually from my Enbridge holdings alone – average $58 per month.
I am an Enbridge gas customer, and the dividend is more than enough to cover my gas bills.
Enbridge & Spectra Merger
Enbridge hits the all-time high of over $65 in April 2015, and then due to the oil crash, share price went all the way down and was trading around $40.
Later, it recovered and was trading around $55. In 2016, the company announced about the merger of Spectra Energy Corp. Initially, it was good news for both companies’ investors, but later, ENB shares started to slide down.
Enbridge valuation
Usually, shares are valued by their yearly earning. Due to the nature of the business model, I (and most analysts) value the stocks using its adjusted-fund-from-operation (AFFO).
Another term used by the company is Distributable Cash Flow (DCF).
As of this writing (all numbers are in Canadian dollar):
- ENB was trading around $42.35
- Book value is around $34.50
- 52 weeks high $56.99
- 52 weeks low $37.36
- Expected AFFO for 2018 - $4.39
- Expected AFFO for 2019 - $4.52
- Price/AFFO (2018) – 9.64
- Annual dividend & yield - $2.68 & 6.33%, respectively
- Payout ratio (based on estimated 2018 AFFO) – 61.05%
The company has increased the dividend by 15% in 2017 and another 10% for 2018, and guided to 10% compound annual dividend per share growth through 2020.
Over 17 analyst issued research coverage for this stocks recently, with 1 strong buy, 9 buys, 7 holds and zero sell with estimated one-year target price range from $55 to $64 per share. Therefore, most analysts are very positive about the company outlook.
Morningstar gives 5-star rating for Enbridge and categories as a wide moat stock.
In my view, everything looks very positive about ENB. Price to AFFO is low and the dividend yield is high relative to historical levels.
Then why the stock is getting beaten-up? We will take a deeper look with a different point of view instead of just checking the numbers.
Why is ENB share price falling?
Stocks market is more about investors’ behaviors than numbers and financial IQ. Occasionally, some stocks hit hard due to negative sentiments toward the companies and/or particular sectors.
Again, all the numbers look good to me. So, I started to view the company from a different angle and came up with 10 reasons why the share price is trading at low.
Again, I am not a financial expert or any sort of things. And, some or all the reasons I posted it here could be completely wrong. Therefore, please do your own research or discuss with qualified financial professionals before making any decisions.
1. Lack of popularity in the USA
Enbridge is a well-known company in Canada, but it is not popular for U.S investors. The Spectra Energy Corp was popular among the U.S investors - both retail and professions investors. Due to the merger agreements, each share of Spectra was converted to .984 Enbridge common shares.
As a result, U.S investors received a massive number of Enbridge shares and they had no idea about the company. So, they started to sell the shares. It could be one of the reasons for the recent sell-off after the merger.
2. Getting removed from U.S ETFs and funds
Spectra Energy Corp was in many popular U.S ETFs and funds. Enbridge is a Canadian stock so those ETFs may not want to hold the Enbridge shares they received through the merger agreement. Therefore, they had no choice than selling them all.
ETFs and funds usually hold a massive number of shares (in millions) in a company. When they start to sell, prices take a massive hit.
3. Getting removed from low volatility ETF and funds
ENB was a low volatility stock for few years, but it is not the case now. Thus, low volatility ETF and funds may start to replace it with another suitable stock. This would have fuelled to more sell-off.
4. Rising rate and debts ratio
Pipeline companies usually carry massive debts. Rising rate will increase debt servicing costs, which will negatively impact the company’s free cash-flow. This could become an issue for the companies to pay dividend and fund for its operation.
Investors who have micro & macro view in the stock market want to replace these types of rate sensitive stocks with rate-pro stocks. ENB could be in their selling list.
Also, Enbridge has some growth projects on its table. Investors have a concern about the company funding method.
They think that company may issue more shares or go further deep into debts to fund the projects.5. Tax changes by U.S FERC
Almost all the pipeline stocks took a hit as results of the U.S. Federal Energy Commission (FERC) removed a key master-limited partnerships (MLP) income tax allowance.
Enbridge has owned a few MLPs in the U.S, so its share price took hit along with other pipelines.
6. Concern about the demand for oil in the future and its price
Even though ENB is a diversified energy infrastructure company, major portion of its revenue comes from crude oil transportation via its pipeline network.
There are no shortages of news regarding energy efficient cars, electric cars & trucks, etc. Thus, many investors start to think about the importance of pipelines if there is no demand for crude to transport and look to replace the stock with a different one.
Also, oil producers will stop/reduce pumping oil if its price gets hammered.
7. Environmental concerns
Building a new pipeline is almost impossible due to the environmental concerns. Companies have to pass so many hurtle to build one.
Line 3 expansion is one of the major projects for the company’s growth. Investors may think that it may not get approved by the local governments. In addition, there are so many concerns about the future growth of the company.
So, investors may sell this stock and buy stocks in different sectors.
8. Income-Investors’ concern about Enbridge dividend sustainability
As mentioned above, ENB is one of the favorite stocks among the dividend investors. Almost all income-focused investors look for relatively safer dividend stocks for their portfolios, and also they think like high-yield means high-risk.
So, when they look for an investment, they screen stock with dividend yield between1% and 5%.
Due to the sell-off, ENB yield has gone up more 6%, and it may view as high-risk stock for new investors. As a result, they may not interest in adding it to their portfolio.
- My monthly Net-Worth Updates
- What I am doing in this market turmoil?
- Rich vs middle class vs poor people – how they spend their money?
9. Fund managers and advisors
Majority of the fund managers have very good knowledge about stocks markets, and know what they are doing and also understand in-and-out about a company they are invested in it.
They all are great people and always look for good returns for their clients. But, almost all of them have one common problem – their clients. Clients are their assets, but they are one is their problem as well.
Why?
Fund managers try to beat the market and beat their competitors; otherwise, clients will fire them and move their money to different investment farm. Thus, fund managers sell falling stocks and buy momentum stocks to get a decent result in a short period of time.
All they want to keep their clients happy so they can make money from fees.
ENB is surrounding with so many negative news and falling. If a fund manager continue to hold this stock, then his/her fund may not perform well for a time period and the clients may not happy about his/her performance
As a result, they may consider sell the stocks.
Fund managers usually hold a larger number of stocks, thus when they sell a falling stock, then the stock get more downward pressure.
10. Retail investors sell when everyone is selling
According to a report, there are so many investors don’t have any idea what they are doing. They just sell when everyone is selling and buy when everyone is buying. They simply follow what mainstreams media say without thinking about companies’ fundamentals or their business models.
What I am doing?
For diversification purpose, I like to allocate a maximum of 5% of my overall portfolio’s value for a stock and maximum of 20% for a sector.
It doesn’t mean I sell the stock when it hits the 5% cap and rebalance my investments. If I have more than 5% in a stock, then I usually stop buying them, and focus on building positions in some other stocks – It is a type of gradual rebalancing using cash-flow.
Enbridge is currently representing around 5% of my portfolio. Therefore, I am not interested in adding more shares right now. If I didn't have any positions or less than 4% of my portfolio, then I would have considered adding few more shares here and there whenever it takes a hit.
In my view, Enbridge’s dividend is safe and there is room to grow as well, and most of the issues mentioned above are temporary. Thus, I assume the share price may start to recover once the sellers are finished selling their positions.
I believe in the management team. They always take the right steps to reward the company owner – aka shareholders.
May be it takes sometimes to recover.
Meantime, I will be collecting dividend and reinvest them to buy more income producing assets.
- Full list of my U.S Dividend Portfolio
- My monthly Net-Worth Updates
- Monthly Dividend Income Reports
- Passive Income
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