Enbridge (TSX: ENB) stock has had an decent run over the last five years. In that period, it has risen 39%, while paying a dividend that (at the beginning of the run) was around 7%. Factoring in both dividends and capital gains, it has outperformed the TSX.
It’s not hard to see why Enbridge would run up so much.
As North America’s largest pipeline, it has 2,840 kilometres of pipeline spanning all across North America. It is a vital supplier of oil to the United States. It’s also a utility, supplying 75% of Ontario’s natural gas. Enbridge’s solid position is further reinforced by the difficulty of getting new, competing pipeline projects approved. If you recall the planned Keystone XL pipeline, that long-awaited project was shut down after U.S. President Biden declared the environmental risks too great. Since then, few new North American pipelines have opened.
All of these difficulties that Enbridge’s competitors have with getting projects moving, is a boon to Enbridge itself, which already has continent-spanning pipeline infrastructure in place. Granted, some of the regulatory issues affect Enbridge itself — it has had trouble getting expansions approved — but it is largely protected by red tape that makes life nearly impossible for its competitors.
So, Enbridge, from a “big picture” perspective, has a lot going for it. With that said, there are also some red flags that merit mentioning — reasons that, for my money, are cause enough to not buy the stock.
Source: Getty Images
Valuation
One factor that Enbridge does not have in its favour right now — at least not strongly — is value. For a company whose earnings declined in the trailing 12-month (TTM) period, and over the last five years, Enbridge trades at inexplicably high multiples. At today’s price, it trades at 23.65 times earnings. 1.55 times sales and 2.3 times book. The earnings multiple is a little higher than the TSX as a whole. The sales and book value multiples are lower. Given that TSX’s earnings are not growing, these multiples appear high. Even the price-to-sales and price-to-book multiples, while being lower than the TSX’s, are high, because TSX earnings are overall increasing while ENB’s aren’t.
Growth and profitability
In the previous section, I wrote that Enbridge isn’t growing much. That’s true, but there are some caveats, so it makes sense to look at growth in more detail.
In the TTM period, Enbridge’s revenue grew 29%, which is pretty good. However, all of its pre-tax, pre-depreciation earnings metrics (e.g., earnings before interest and taxes, earnings before interest, taxes, depreciation, and amortization) grew by low single digits, while its net income shrank. It looks like there could be issues with cost management here.
We see a similar trend when we look at longer term timeframes. Over the last five years, Enbridge’s revenue grew by 14% compound annual growth rate (CAGR), while its earnings shrank by 2% CAGR. Its free cash flow (FCF) has almost always been negative.
Turning to profitability: Enbridge has a 7.3% net margin, a -1.24% FCF margin, a 9.7% return on equity, and a 4.2% return on capital. These metrics aren’t terrible, but they don’t inspire a ton of confidence either. So, I reiterate: Enbridge’s valuation when considered alongside its growth and profitability appears questionable.
Future prospects
Now, a company’s past growth/profitability history doesn’t say everything there is to be said about its future prospects. Sometimes a new pipeline project can cause a company like Enbridge to experience a growth spurt. However, Enbridge keeps getting thwarted by courts in its attempts to build or expand pipelines. So any growth it enjoys will be very incremental growth from raising tolls charged to new or renewing clients. So, it does not appear that Enrbidge’s growth rates will pick up in any serious way.
The bottom line
Enbridge is certainly a fine company. However, it’s not one that is growing especially fast, which calls into question the wisdom of buying it at a nearly 24 price-to-earnings ratio. Personally, I would look elsewhere for appealing investment opportunities.
