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The Super Stocks of Canada: Enbridge Ltd

July 23, 2011 | About:
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Gordon Pape

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This week we are launching a new series, titled The Super Stocks. It will highlight Canadian companies that we believe should be core holdings in every portfolio. Most of these are already on the IWB Recommended List. However, some have been there for so long (more than a decade in a few cases) that more recent members may not be familiar with them or may dismiss them as "old" recommendations. That would be a mistake. These are all solid companies with fine track records of both dividend growth and price appreciation. In selecting them, we are very conscious of portfolio diversification so we will choose only one stock from each sector. Here is our first Super Stock nomination.

Enbridge Ltd. (ENB)

The business: Calgary-based Enbridge is a multi-faceted operation. It is best-known for its huge pipeline business which is the world's longest crude oil and liquids transportation system. But it also is Canada's largest natural gas distributor, serving Ontario, Quebec, New Brunswick, and New York State. As well, Enbridge is increasingly involved in the natural gas transmission and midstream businesses, and is expanding its activities in renewable and green energy technologies including wind and solar energy, hybrid fuel cells, and carbon dioxide sequestration.

The company has about 6,000 employees in Canada and the U.S. and has been recognized as one of the Global 100 Most Sustainable Corporations in the World.

The security: The common stock trades on both the Toronto and New York Exchanges under the symbol ENB.

Why we like it: Enbridge offers all the attributes we look for in a superior stock, including the following:

Dividends. The company has an excellent dividend history. It has paid dividends for more than 58 years, with an average increase of 10% annually over that time. The company has increased its payout every year since 1995 to the current $0.245 per quarter. This is the post-split amount; the shares split 2 for 1 in May. The current yield is 3.1%.

Growth. Steadily increasing dividends, revenue, and profits translate into long-term share price appreciation. Since we first recommended Enbridge in the IWB back in 1999 at a split-adjusted price of $8, the share price has increased by almost 300%.

Treatment of shareholders. One of the company's top priorities is delivering value to shareholders and it has proven repeatedly that this isn't an empty promise through dividend hikes, share splits, and a good dividend reinvestment plan that offers a 2% discount on the stock.

Management. Enbridge is widely acknowledged to have one of the best management teams in the country, led by CEO Patrick D. Daniel. The company's handling of the widely-publicized Michigan pipeline spill last year was generally praised for its efficiency and compassion.

Balance sheet. The balance sheet is sound, in fact there have been some complaints that the company is too cash-rich. Commenting on this last week, contributing editor Tom Slee suggested that the money is likely to be used for financing new projects rather than taking on more debt or issuing new equity. There's nothing wrong with that.

Future projects: Enbridge is known for never standing pat. The company always has several billion dollars worth of new projects in various stages of development. Some, such as the multi-billion dollar Northern Gateway Project to transport output from the oil sands to the B.C. coast are controversial and may never get off the ground. Others, such as the Wood Buffalo Pipeline Project, the Norealis Pipeline Project, the Waupisoo Capacity Expansion Project, and the Christina Lake Lateral Project are either under way or close to the start of construction.

Risks: Pipeline breaks are the most visible risk because they tend to attract widespread media coverage, especially during these environmentally conscious times. However, the Michigan incident did not have any serious effect on the bottom line and prompt action by the company minimized the public relations impact.

Economic risk is more serious. Another recession would hurt revenue to some extent. However, because of the nature of its business, Enbridge tends to be more recession-resistant than many other companies.

Although the shares are subject to stock market risk, they do not display extreme volatility. A review of the stock performance during the 2008-09 market plunge shows only a modest decline.

Distribution policy: As mentioned, the shares pay a quarterly dividend of $0.245, or $0.98 a year. That's up 15% from last year.

Tax implications: The dividends are eligible for the enhanced dividend tax credit.

Who it's for: Just about everyone. The stock will fit well in either an income or a growth portfolio. If you don't own it, you need to ask yourself why.

Action now: Buy. - G.P.

About the author:

Gordon Pape
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.6/5 (11 votes)

Comments

chaoranhu
Chaoranhu premium member - 2 years ago
Can you post any current or past analysis/comments as to why ENB is attractively valued? While it's true the company's stock has performed very well over the last 15 years, it would be comforting to see justifications for its past price action.
Adib Motiwala
Adib Motiwala - 2 years ago
Yes, basic aspects like market cap, EV, valuation ratios, FCF, Op Income, etc would be useful information to ascertain the attractiveness.

Just ran a quick check and here are the valuation metrics

Market cap 23 billion CAD, EV 39 billion CAD, Net Income 1billion CAD giving

P/E 23, EV/EBIT 23, EV/EBITDA 15x.

Capex > Cash Flow from Ops. Hence, FCF is negative for the last four years.!


ken_hoang
Ken_hoang - 2 years ago
Thanks for the post Gordon and thanks for the financial snapshot Adib, the financial ratio of the company does not seem to be interesting, for the pipeline business, it seems to have large capex to maintain the pipeline, it employed large amount of long-term debt to finance its capex.

However, the business model I think is quite hard to replace for natural gas distributor, it seems to have the unique position. Could you please give some more details on its closest competitors for comparison Gordon?

Thanks

Anh
chaoranhu
Chaoranhu premium member - 2 years ago


Thanks for the responses. It would be good if anyone can post a set of base line valuation metrics for looking at companies in the pipeline business and doing peer comparisons in the sector.

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