What Will it Take for Enbridge Inc. to Turn Around?

It’s possible that Enbridge Inc. (TSX:ENB)(NYSE:ENB) already hit a bottom. Now, it offers a rich 6.4% yield.

| More on:
The Motley Fool

Enbridge Inc. (TSX:ENB)(NYSE:ENB) stock has fallen ~26% in the last 12 months and ~35% from its five-year high. What will it take for the stock to turn around?

The energy infrastructure sector in general has been under pressure. However, the stock of TransCanada Corporation (TSX:TRP)(NYSE:TRP), Enbridge’s competitor, has held up better.

Does Enbridge really have high debt levels?

The pressure on Enbridge stock might have to do with increasing interest rates, as the company is perceived to have higher debt levels. However, when compared with TransCanada, Enbridge actually looks better on half of the following metrics.

At the end of 2017, TransCanada’s debt-to-asset ratio was 0.68, its debt-to-equity ratio was 2.76, its cash-flow-to-debt ratio was 0.09, and its debt to EBITDA was 4.7 times, while Enbridge’s debt-to-asset ratio was 0.61, its debt-to-equity ratio was 1.71, its cash-flow-to-debt ratio was 0.07, and its debt to EBITDA was 6.3 times.

Notably, Enbridge’s lower cash-flow-to-debt ratio might have to do with the fact that it completed its huge merger of Spectra Energy Corp. on February 27, 2017. When we see a full year of contribution from Spectra Energy Corp. this year, Enbridge’s cash-flow-to-debt metric should align better with TransCanada’s.

By the end of the year, Enbridge expects that its cash flow will allow it to deleverage and reduce its debt to EBITDA to five times, which will then be better aligned with TransCanada’s debt to EBITDA.

Lots of moving parts in Enbridge’s capital program funding

Last year, Enbridge raised nearly $14 billion of capital for its growth plan, of which $5 billion was equity or equity equivalent funding, which caused some dilution in the stock. This year, Enbridge plans to raise funds by issuing $3.5 billion of hybrid securities, which could further dilute shareholders, as well as sell +$3 billion of non-core assets.

Assuming all of the above goes well, the company still has to raise $1.5 billion for its growth plan from additional hybrid equity, asset sales, or issuances of common shares under the company’s dividend-reinvestment plan. So, all of these moving parts to its funding program may have gotten some investors nervous about the stock.

Dividend growth

Enbridge has increased its dividend for 22 consecutive years with impressive five-year and 10-year dividend-growth rates of 16.4% and 14.6%, respectively. The company increased its dividend by 15% last year and by 10% this year. And the company aims to grow its dividend on average by 10% per year through 2020.

However, with the uncertainty around its capital program, the market wonders if Enbridge will have sufficient capital for both its growth plan and its dividend-growth targets.

Investor takeaway

If Enbridge is able to reduce its debt to EBITDA to five times by the end of the year, show more clarity for its capital program funding over time, and keep to its word on growing its dividend by 10% per year, the stock should start turning around. In fact, the stock might already have hit a bottom at ~$38 per share early this month and could be an excellent value here.

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 »