Insight into a long term strategic dividend approach.
Why Enbridge fits the requirements for the dividend strategy.
Background information on Enbridge and managements outlook for the next years.
2017 was a rattling year for shareholders in Enbridge (NYSE:ENB) and Enbridge Income (OTC:OTC:EBGUF) as an aggressive expansion effort left the markets questioning how the company would expand the business over the coming years and continue to increase dividends. Shares in Enbridge reflected concerns from investors as the stock dropped steeply in the second half of 2017, from a year high of $58 / share to a low of $43 / share.
In Q1 2017, Enbridge closed the acquisition of Spectra Energy in a share-swap transaction valued at $28 billion, which created the largest energy infrastructure company in North America. The combined company, at the time of transaction, had a total enterprise value of over $125 billion. Enbridge shareholders gained 57% of the new business while Spectra shareholders stood with 43%. The new Enbridge has business units involved in crude oil, terminal and midstream liquid and natural gas pipelines, regulated utility portfolio, and renewable power generation.
The dividend hike in 2017 saw the overall amount paid to shareholders increase by 15%, but still investors wanted to see what the future would hold for shareholders. It took the management nearly until Q4 2017 to address concerns from shareholders, which was expected due to the sheer size of the transaction that was undertaken. However, a corporate update delivered at the end of November reversed the downward spiraling stock price and prices recovered back to the $50 / share range. The update provided much needed insight into the new organization. Here are a couple of the key points that were provided by the management team:
- In 2017, the company hiked the dividend by 15%, which will be followed by a 10% increase in 2018. In 2019 and 2020, the company will increase the dividend each year by 10%.
- $22 billion capital program in place until 2020
- Up to $10 billion in assets listed as non-core; $3 billion will be disposed in 2018
- Announcement of an equity issuance of $1.5 billion private placement; $4 billion follow on in 2018
My long-term, strategic dividend approach is based on three core pillars: i) a moderate base yield of around 5%; ii) an increase in dividend year over year in the 5% range; and iii) an increasing stock price over the long-term of around 3% / year. This strategy is covered extensively in my book, Winning the Dividend Game – A simple and strategic stock investing approach to building wealth and generating income (Livio Filice 2017). The model is based on time being the strongest asset, which allows for dividends to be produced, collected, and reinvested back into other equities that further exposes the investor to the above three core pillars.
For example, based on a 2017 dividend rate of $2.68 / share, shareholders should receive $2.94 / share in 2018, $3.24 / share in 2019, and $3.56/ share in 2020. Based on a $50 / share price at the end of 2017, long-term shareholders can recognize a dividend yield of 7% in 2020.
Long-term, strategic dividend investors, including myself, should be interested in Enbridge as it offers clear visibility into the dividend structure over the next three years and will provide a long-term income generator of over 7%. The company has a business and financial strategy in place to execute on the plans that will take investors into the next stage of growth, which could also lead to a growing share price over the next few years. Collectively, owning shares in Enbridge gives investors exposure to a strong current dividend, potential increase in the dividends received, and an increasing stock price over time.
Disclosure: I am/we are long ENB, EBGUF.