The Motley Fool

Enbridge Inc. and its Misleading Dividend-Growth Forecast

You have probably heard about Enbridge Inc. (TSX:ENB)(NYSE:ENB) being a great business. Don’t get me wrong. I agree it’s a great business. Its storage and pipeline assets are necessities to store and transport oil and gas. Its predictable business generates stable and growing cash flows that should continue to support a growing dividend.

Dividend growth clarification

However, there needs to be some clarification about its dividend growth. Enbridge forecasts to grow dividends by a compound annual growth rate (CAGR) of 14-16% through to 2018.

In 2015 Enbridge’s dividend increased from $0.35 per share in 2014 to $0.465 per share. That is a growth rate of almost 33% in one single year!

That means that even though the company forecasts a CAGR of 14-16% through to 2018 for its dividend, a big portion of that growth already happened in 2015. So, when the company forecasts the 14-16% growth, investors need to think of 2014’s dividend as the starting point and not the 2015 dividend.

In that case, we can forecast total, annual payouts of $2.36 per share to $2.53 per share by 2018. The former uses an annualized growth rate of 14% starting from 2014, while the latter uses an annualized growth rate of 16% starting from 2014. Assuming investors buy at or under $55 per share, that would indicate a yield on cost of at least 4.3% to 4.6% by 2018.

To clarify, because 2015’s annual payout is anticipated to be $1.86 per share based on a quarterly dividend of $0.465 per share, the dividend is forecast to grow at a CAGR of 8.2-10.8% from 2016 to 2018. Although this would still be phenomenal growth for such a big company as Enbridge, there is a difference between these numbers and 14-16%.

Valuation

Still, there’s no argument that Enbridge is priced at a value today. Other than the fact that it is still over 16% below its 52-week high of $66, Enbridge yields over 3.4% today, which is considered high for the high-growth company.

Growth

Enbridge’s growth capital program of $44 billion from 2014 to 2018 is already in motion. About $13.8 billion of the projects are in service, and $34 billion will be commercially secured by the in-service date. Part of the growth is already evident with last year’s surprising dividend hike of close to 33%.

In conclusion

Investors should not buy Enbridge today and expect a 14-16% annual growth in its dividend through to 2018. Rather, investors should expect an 8-11% growth in Enbridge’s 3.4% dividend.

If investors are looking for a similar investment with a higher yield, TransCanada Corporation (TSX:TRP)(NYSE:TRP) is an alternative. It yields 4.5% at under $46 per share, and the company forecasts to increase dividends by 8-10% through to 2017.

Of course, there’s nothing stopping investors from investing in both companies for a blended yield and growth for their investment.

2 energy plays for your watch list

Check out our special FREE report 2 Canadian Energy Stocks on the Cusp of a Powerful Long-Term Trend. In this report, you’ll find that Canada is rich in other energy sources that are poised to take off. Click here now to get the full story.

Fool contributor Kay Ng owns shares of Enbridge, Inc. (USA) and TransCanada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.