There are a lot of great dividend stocks in Canada. We’re blessed to have some of the world’s greatest companies right here at home.
For many investors, the problem isn’t finding a good dividend payer. There are dozens of companies that have dominant positions in their respective industries trading at reasonable valuations with solid balance sheets. Sure, such stocks aren’t cheap, but they’ll likely always be a little expensive. We’re often forced to pay a little extra for quality.
A true leader
Warren Buffett has a simple test to see how secure a company’s competitive advantage is. If somebody gave you or me $10 billion and told us to compete with an incumbent, how would we do? Could we make a dent?
The answer is pretty simple with Enbridge. I wouldn’t even try.
Enbridge currently transports 3.5 million barrels of oil per day through its liquids pipelines with another 420 billion cubic feet of natural gas passing through its gas pipelines. About 2.1 million customers heat their homes with Enbridge natural gas. And the company also has 23 wind and solar power projects, which collectively generate 1,776 MW of capacity.
The company is getting bigger too. When its merger deal with Spectra Energy (NYSE:SE) goes through, the combined company will feature an enterprise value of $165 billion. The deal will make it one of the five-largest stocks listed in Canada and the largest energy infrastructure company in North America. It’ll have revenues of approximately $40 billion with earnings before interest and taxes of close to $6 billion. Oh, and the new company will retain more than $500 million per year of synergies.
The new Enbridge isn’t too big to grow at a reasonable clip either. Both Enbridge and Spectra have a combined $26 billion in new growth projects planned over the short term with another $48 billion in the works as well.
This should lead to fantastic earnings growth. Management projects Enbridge will grow available cash flow from operations between 12% and 14% annually through 2019; it will also grow the dividend between 10% and 12% annually through 2024.
Terrific historical results
Investors who bought Enbridge 20 years ago are very happy today.
If you’d invested $10,000 in the company back in January 1997, including reinvested dividends, it would be worth more than $324,000 today, excluding taxes or trading fees.
That is a seriously good investment.
There’s no guarantee that Enbridge will perform this well going forward, of course, but I like its chances. The company’s pipelines aren’t going anywhere. In fact, they’ll just get more valuable as energy recovers.
Perhaps the best part of an investment in Enbridge is that investors don’t even need the stock to shoot higher for it to be a nice investment. Dividend growth will take care of that.
Remember, the company plans to grow its dividend by 10-12% annually between now and 2024. Shares currently yield 3.7%.
If we assume the company will grow the payout by 10% annually for the next seven years, the quarterly dividend will be $1.03 per share, or $4.12 on an annual basis. Shares trade hands at $57.50 as I write this. Investors could easily have a yield on cost of 7.2% if they buy now and hold on until 2024.
The bottom line
Enbridge shares aren’t cheap, that’s for sure. But that’s okay. Investors often need to pay a premium to own the market’s best companies.
Enbridge has fantastic assets, a growth plan that will actually impact the bottom line, a great dividend with huge growth potential, and a history of crushing the market. Nothing is guaranteed for the next few decades, but I think it’s a bad idea to bet against such a great company.
If you don’t buy today, you really could be kicking yourself later. It’s that simple.