There are value traps and then there are hated stocks.
Enbridge is the latter, in my opinion.
After hitting a peak of $56.03 in February, its share price plummeted by about 37% and has only partially recovered its losses. Since November, however, Enbridge shares have rallied about 23% off its lows. Pretty good, but at $43/share it’s still far from it’s pre-Covid high.
With a dividend yield at 7.67% you might think Enbridge is a value trap and the market is pricing in a dividend cut. While that’s a fair assumption, I personally disagree.
First of all, Enbridge’s business model is fantastic. It provides a product and service that has fairly inelastic demand with no real substitutes and little competition. While many companies saw revenues drop close to 100% during the March/April lockdowns, Enbridge experienced a 25% drop from Q1 2020 to Q2 2020. A tough quarter, but not a death blow.
Moreover, Enbridge is run by a fantastic management team with decades of cash flow growth provided to shareholders. Indeed, after possibly the worst year for the economy on record Enbridge management is actually predicting full year 2020 cashflows to grow vs 2019. This company can grow cashflows through thick and thin.
After 2020, Enbridge management expects cashflow (aka Distributable Cash Flow – DCF) to continue to grow by 5-7%.
At $4.50-$4.80, expected full year 2020 cashflows more than adequately cover the annual $3.34 forward dividend. Management has such confidence that on December 8th announced Enbridge’s 26th consecutive annual dividend increase. That’s a solid track record.
All things equal, with a 7.67% yield and DCF growth of 5-7%, would a total return of 12.67%-14.67% be a reasonable intermediate forecast based on cash distributions? Maybe. Of course, other variables (Covid-19 anyone?) can impact the share price, but this naïve forecast aligns with Enbridge’s 25 year CAGR of 15%.
I personally hold Enbridge stock. I’d buy more if I didn’t already have a substantial position.