Usually what happens for new investors in the stock market is they buy a stock, and then the stock goes down in the next month, next day, or even the next moment. Inexperienced investors think that they chose the wrong stock or bought at the wrong time.
Well, in the short term, the stock market is a voting machine. The more people buying in one moment, the higher the stock goes. Likewise, the more people selling in one moment, the lower it goes.
So, investors can’t just focus on the stock price. What investors really need to look at is the business performance, the valuation, and the company forecast.
Enbridge Inc. as an example
Enbridge Inc. (TSX:ENB)(NYSE:ENB) has gone down 15% from its 52-week high of $66 per share to below $56, while the company’s earnings per share (EPS) continues to increase. In fact, the company forecasts its EPS to grow by 10-12% per year for the next few years.
The earnings growth should support the growth of its dividend. The company has a culture of hiking its payout. It has done so for 19 years in a row already. Actually, the company projects dividends to grow at a compounded annual growth rate (CAGR) of 14-16% between 2015 and 2018.
In a decade’s time, between the end of 2004 and 2014, Enbridge went from $15 per share to $59 per share. An investment at the start of that period would have earned you almost three times the investment: $10,000 would have become $39,333. In other words, this was a CAGR of 14.7%.
In the same period, its EPS increased from $0.69 to $1.90. That’s 175%, or a CAGR of 10.7%. Also, its total annual payout grew from $0.46 per share $1.40, a growth of 204%, or 11.8% per year.
It’s possible for its dividend growth to be higher than its earnings growth because in that decade the payout ratio expanded from 66% to 74%. The company website indicates that Enbridge now targets the payout ratio to be 75-85%, meaning a blend of earnings growth and payout ratio expansion can sustain the target dividend growth.
It is not difficult to see why Enbridge’s business model works beautifully. It invests in its pipeline infrastructure that transports over two million barrels of oil every day. It doesn’t matter what the oil price is. Oil still needs to be transported, and Enbridge gets paid for doing the job.
In conclusion
In the short term, the market has bid down Enbridge’s shares, but the company continues to do well and even forecasts double-digit growth for its near-future earnings and dividends.
Just because you bought the shares at $59 and it’s now under $56, that doesn’t mean you’re wrong. It just means that Enbridge is priced more compellingly to investors today than it was before.
Based on Enbridge’s earnings growth forecast, a conservative total return estimate is between 13.4-15.4% per year up to the end of 2018.
Based on the forward price-to-cash-flow metric, Enbridge should trade at least at $68 by the end of the year, but we know in the short term that the market is a bidding game. All we can do is dollar-cost average into high-quality companies such as Enbridge and hold on to its shares to maximize our long-term returns.
Remember, the market’s trends don’t make you right or wrong in your buys. Focus on the business, not the price.
