What’s Dragging Down Enbridge Inc. Shares?

Should you buy Enbridge Inc. (TSX:ENB)(NYSE:ENB) after the 20% pullback?

| More on:

Enbridge Inc. (TSX:ENB)(NYSE:ENB) is known for its strong dividend-paying history with +60 years of dividend payments and 21 consecutive years of dividend growth.

Yet, its dividend yield has been pushed up to nearly 5.2%, as its shares declined 4.8% on Thursday after releasing its third-quarter results. The stock is nearly 20% lower than it was a year ago.

What’s dragging down the stock?

Higher interest rates

At the end of September, Enbridge had about $61.4 billion of long-term debt on its balance sheet. And the company needs to pay interest on the debt. In the first three quarters of the year, Enbridge booked interest expense of about $1.7 billion.

Enbridge has a policy to not have more than 25% of its total debt exposed to floating interest rates, which should limit the impact of rising interest rates. Nonetheless, interest rate hikes will make it costlier for the company.

Notably, Enbridge took on about $24.2 billion of debt in the first quarter. About 90% of it was for the acquisition of Spectra Energy. Enbridge also raised funds by issuing some shares. The dilution was a part of the reason why Enbridge had lower cash flow per share.

Lower cash flow per share

In the first three quarters, Enbridge generated higher available cash flow from operations (ACFFO) than the same period in 2016. However, it was 16.6% lower on a per-share basis. For Q3, it was 10.9% lower than the same period in 2016.

In the Q3 report, management reaffirmed the guidance range of $3.60-3.90 for its ACFFO per share this year. If Enbridge achieves that, it’d imply a payout ratio of about 62-68% of cash flow. So, the company’s dividend should be intact.

What’s the risk in the Line 3 replacement project?

Enbridge intends to put in service $12 billion of investment projects this year. About 85% are already online. Next year, there’s about $7 billion of investments.

The biggest risk lies in the Line 3 replacement project, which is Enbridge’s biggest investment in the three-year period ending in 2019. Line 3 is a ~$9 billion project (about 56% invested in Canada and 44% in the U.S.) The bigger a project is, the more complex it is, and the bigger chance for potential problems to occur.

The construction for Line 3 began in the summer in Canada and is underway for North Dakota and Wisconsin. Enbridge is still waiting for the green light from Minnesota.

Investor takeaway

No investment comes without risk. I liked Enbridge when it yielded 4.5%, and now that it yields 5.2%, I like it even more as a buy, as some of its risks have played out. That said, cautious investors should wait for some consolidation in the stock before buying.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Enbridge. The Motley Fool owns shares of Enbridge. Enbridge is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »