Enbridge impresses again
JOHN HEINZL
jheinzl@globeandmail.com
theglobeandmail.com
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May 8, 2008
Looking for a company that delivers consistent earnings growth, raises its dividend regularly, has billions of dollars of projects coming on stream and whose stock has returned 13 per cent annually over the last half century?
Here's a clue: It's in a commodity business that's booming right now, but it's not directly exposed to commodity prices, so shareholders can sleep well without worrying that the good times will suddenly come to an end.
The company is Enbridge Inc., Canada's largest pipeline operator, and yesterday it showed again why it deserves to have a place in investors' portfolios as first-quarter profit rose 11 per cent, sending its shares to a record.
The stock, which trades at about 23 times estimated 2008 earnings and yields 3 per cent, isn't especially cheap right now, having run up to $43.05 from $35 last summer. But for long-term investors, the Calgary-based company offers a compelling combination of safety, growth and income.
Enbridge derives about 80 per cent of its earnings from fixed, long-term shipping contracts. Moreover, 95 per cent of its profit comes from regulated businesses, generating a predictable earnings stream.
The company has raised its dividend for 13 consecutive years, and more increases are expected. According to Bloomberg, the quarterly dividend is projected to climb to 35.25 cents a share in 2009 and 37.5 cents in 2010, up from 33 cents currently.
Enbridge expects earnings to grow at an average annual rate of 10 per cent over the next four years as it brings on $12-billion of new oil pipelines, including projects to handle the growing output from Alberta's oil sands.
Complementing its pipeline and natural gas utility operations, Enbridge has interests in three wind farms - two in Alberta and one in Saskatchewan - and later this year expects to complete a $500-million project north of Kincardine, Ont., that will be Canada's second-biggest wind power generator.
"It's a great company for conservative investors who are looking for dividends plus growth," says Tony Demarin, president of BCV Asset Management in Winnipeg, which owns Enbridge shares. Because most of its operations are regulated, "this is not a company that's going to double in value in a short period of time. So it's a more conservative way to benefit from the energy business."
That's not to say the stock is risk free. Pipelines and utilities are highly interest sensitive, so an uptick in short-term rates could send the stock down as more investors seek the relatively safe returns of bonds. Enbridge could also face higher costs for labour and materials, which would dent its profit, he says.
There's also dilution risk should the company decide to raise money for expansion by issuing more stock, as fellow pipeline operator TransCanada Corp. is doing. But Mr. Demarin's main reservation is Enbridge's valuation. He considers the P/E of 23 rich for a company whose profit is growing at 10 per cent. So he recommends waiting for the price to decline before buying the stock.
"I think now a lot of the good news has been baked into the price," he says. "It's a nice solid hold here for long-term investors, but wait for better opportunities to buy." |
