Enbridge (TSX:ENB) has been a major favourite dividend stock for Canadian investors over the past decades. There is no doubt that the company has a portfolio of highly essential and critical energy assets.
Enbridge stock is yielding 7.7% today. For many, the high dividend and large diverse asset portfolio make this appear like a no brainer investment. However, income investors do need to look at Enbridge with a critical eye.
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A decade on and the stock is only up 2%!
Consider that over the past 10 years, Enbridge stock price has gone nowhere. In November 2013, its stock price was $45 per share. Today, ENB trades at ~$46 per share.
That means that over a decade, shareholders have only earned a 2% total capital return. If you add in its dividends, its total returns rise to 61% (or 4.88% annualized).
That only beats the TSX Index by a mere 0.8 annual percentage points over that time. Its current average return is below what you can earn from a very safe GIC (guaranteed investment certificate).
Despite its attractive dividend and large portfolio of assets, this energy stock’s returns may not be as good as investors consider them to be. While the company has grown considerably, it has ballooned its balance sheet and significantly diluted shareholders.
Enbridge’s debt has ballooned
For example, since 2013, its net debt has increase 200% from $25 billion to over $75 billion today. Debt now makes up 41% of its enterprise value. That debt burden is expected to increase by US$15 billion as it integrates its recently announced natural gas utility portfolio acquisition.
With bond interest rates charging over 6%, there is concern that this debt burden could start to seriously impact earnings power (and dividend sustainability and growth).
This concern is especially true as Enbridge’s debt matures and turns over at these higher rates.
Enbridge’s share count has soared
Since 2013, Enbridge’s share count has risen 150% to 2 billion shares. That doesn’t include the 100 million shares (5% dilution) it recently issued to help finance the above utility acquisition.
Enbridge issued its shares at a discounted valuation to the utility it’s purchasing. That should make shareholders question how earnings accretive the acquisition will really be.
The other issue to be aware of is how share dilution affects dividend sustainability. The more shares, the more dividends it must pay to shareholders.
As its share count rises, it becomes harder and harder to afford its substantial dividends. This strategy is in essence robbing Peter to pay Paul. Over the long term, nobody wins.
Enbridge is likely making the big utility acquisition to offset a weakening return profile from its mainline energy pipeline. New pipelines in Canada are going to create heightened pressure on rates. As a result, Enbridge may be seeking to backfill this decline in its main toll line returns.
What’s the long-term outlook for returns?
It does not appear like Enbridge is suddenly going to become a better investment than it was over the last decade. If shareholders get returns aligned with history, they will be lucky.
Over time, the company has failed to accrete earnings per share growth. Today, the pipeline infrastructure company’s balance sheet is stretched. While you might collect an attractive dividend yield today, it may not be enough to offset little to no earnings per share growth (and capital returns) in the coming years.
