One of the problems with many investors is a lack of patience.
Everyone has heard the stock market is an easy path to riches. So they take a few thousand dollars and put it to work in the market, increasing the value of the stake from $4,000 to $5,000 in a couple of years. A 25% return isn’t bad, but it’s not enough for an impatient investor. They just don’t realize how long it takes to build wealth.
If you increase the holding time to a couple of decades, capital really begins to accumulate. Let’s look at a real-life example to really drive the point home. Let’s say an investor bought $5,000 worth of Enbridge Inc. (TSX:ENB)(NYSE:ENB) shares 20 years ago. This investor did nothing except hold the shares and reinvest the dividends over the next two decades.
A $5,000 investment in Enbridge back in April 1996 would be worth more than $171,000 today. This represents an annual return of 19.3%, one of the best results on the TSX Composite.
It gets even better. Based on Enbridge’s current dividend yield of 4.3%, this investment would be generating more than $7,300 annually in dividends. Not bad for a $5,000 original investment.
The truth is, nobody has a crystal ball that can accurately predict how well Enbridge will do over the next 20 years. The stock probably won’t return 19.3% annually. But it is well positioned to be a leader going forward. Here’s why.
Strong growth potential
Enbridge has an enterprise value of approximately $85 billion, consisting of $45 billion in equity and $40 billion of debt. Its pipelines stretch across North America. Through controlled subsidiaries, the company also has stakes in other assets like power generation and storage facilities.
Even though it is one of North America’s largest energy companies, Enbridge still has plenty of growth ahead. It has $26 billion worth of projects currently on the go, enough to keep workers busy until 2019. These projects include building new power and pipeline assets in places like Alberta, the Midwestern United States, and eastern Canada. Included is the biggest project of them all, the 1,176 km Northern Gateway pipeline from Alberta to ports in British Columbia.
Enbridge has survived this energy bear market because management has repositioned the company to have very little exposure to commodity prices. Less than 5% of revenues are tied to the price of oil or natural gas, a strategy that’s looking very astute in hindsight. Additionally, 95% of cash flow is from strong, long-term commercial constructs coming from companies with investment-grade debt ratings. In other words, most of Enbridge’s customers will survive this oil rout.
Over the last decade, dividend growth has been nothing short of spectacular, coming in at 14% per year. In 2006, dividends per share were $0.56 annually. In 2016, the dividend is projected to be $2.12 per share. Dividend growth is expected to continue at about that same pace for the next five years as new projects come online.
Balance sheet strength
Through publicly traded subsidiaries such as Enbridge Income Fund and Enbridge Energy Partners, the company is able to maintain the balance sheet strength needed to finance new expansion projects.
Here’s how it works. When it takes on too much debt, the company sells assets to one of its subsidiaries using what’s called a drop-down sale. Enbridge still collects some of the profits from the assets while transferring any liability associated with those assets to a different company. This gets the debt off of Enbridge’s balance sheet.
Essentially, the parent company keeps all the prime assets while selling the rest off. It’s a good deal.
Investors probably don’t think a pipeline company is a very exciting investment. But if the company can continue the kind of growth demonstrated over the last 20 years, investors will still be very happy with the results.
