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Enbridge Inc.: Will the Stock Ever Return to its Market-Beating Ways?

The bleeding continues for Enbridge Inc. (TSX:ENB)(NYSE:ENB) shares, which continue to punish investors who have bought shares on the way down. If you’d bought a large position at once, you’re probably feeling the pain and may be contemplating whether or not you should cut your losses before things get worse.

Enbridge is a falling knife right now, and although the company is a former market darling, it’s usually never a good idea to initiate an entire position all at once. Although a bell goes off at the opening and closing of the NYSE exchange, we all know that the same doesn’t happen when a stock hits a peak or a bottom, and unless you’re a fortune teller (or an experienced technician), it’s pretty much impossible to catch a stock at its bottom, especially if it has a scary amount of negative momentum behind it.

When will the bleeding stop for Enbridge?

Enbridge shares have now fallen to a five-year low, and the dividend keeps soaring, as the stock continues to fall further into what seems like a bottomless pit. The 6.86% dividend yield is mouth watering, and unlike most ~7%-yielding stocks, the dividend is safe, and it’s poised to continue to grow, which has kept a lot of long-term income investors in the stock, despite the company’s recent troubles.

Management is incredibly shareholder friendly, perhaps too friendly for their own good, as the company is poised to sell up to $10 billion in non-core assets to finance existing projects, while simultaneously maintaining and gradually increasing its generous payout to shareholders. Investors may also stand to feel dilutive effects; the company is looking for alternative ways to fund its generosity when normally most firms would just reduce its payout or keep it static until operations are back on track.

Is an extremely shareholder-friendly management team really a good thing for investors?

As we’ve seen with Corus Entertainment Inc. (TSX:CJR.B), shareholder-friendly management teams who are willing to keep dividend payments alive through tough times are not indicative of a business that won’t experience major losses over a very short period of time. In fact, a stubborn management team may actually be harming itself over the long haul by continuing to pay a dividend instead of using the proceeds to eliminate debt, finance additional growth endeavours, or invest in long-lasting cost-saving initiatives.

Corus has kept its dividend intact despite falling nearly 75% from peak to trough, allowing for its yield to swell north of 16%. Unlike Corus, however, Enbridge has promising growth drivers that are slated to come online within the next few years. The Line 3 replacement program is one such driver that will provide incremental capacity to support crude production growth, and once online, it will provide some relief to shares, possibly causing a sudden bounce back. In the meantime, though, one cannot rule out the possibility of more short-term pain.

Bottom line

When it comes to buying deep dips, you should never consider initiating your position all at once when you could lower your cost basis by averaging down with incremental buying. If you don’t see yourself buying more shares of a company when it gets cheaper, then it’s probably best to just avoid buying shares of a falling knife to begin with.

That said, if you’re a true long-term investor who intends to hang on to shares for over five years, then now’s as good a time as any to continue accumulating more shares. Nobody knows when the near-term bleeding will stop, however, so make sure you’ve got ample cash on the sidelines.

In time, I believe Enbridge will return to grace, and those who exhibit patience will be the ones to ride the next leg up with a safe, above-average yield locked in. Don’t expect one to happen suddenly over the near term, though, as Enbridge remains a play for those who are willing to feel short-term pain for long-term gain. The ridiculously high-yield dividend will only mean something for those who stick around long enough to collect it.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool owns shares of Enbridge. Enbridge is a recommendation of Stock Advisor Canada.

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