Dividend Stock Wednesday: Enbridge (CA:ENB)

Note: I use the Stock Selection Guide Software and its methodologies from the CSA to perform the bulk of my analysis on stocks. This is not a recommendation to buy a stock – it is my analysis only. Please do your own research.

Company Profile:

Enbridge operates, in Canada and the U.S., the world’s longest crude oil and liquids pipeline system. The company owns and operates Enbridge Pipelines Inc. and a variety of affiliated pipelines in Canada, and has an approximate 15% interest in Enbridge Energy Partners, L.P. which owns the Lakehead System in the U.S. These pipeline systems have operated for over 55 years and now comprise approximately 13 500 kilometres (8,500 miles) of pipeline, delivering more than 2 million barrels per day of crude oil and liquids.

Revenue Profile and Projection:

Let’s start by examining management’s ability to convert the companies products and services into increased sales on a consistent basis, year after year. To pass the revenue test, the company must possess the following two attributes:

1. a steady and consistent revenue uptrend
2. the ability to continue to grow revenues in the future, giving consideration to such things as demographics and market trends (i.e. the move from film to digital)

The revenue profile:

The revenue profile for ENB is presented below. The revenue trend is up with some very slight dips from year to year. Overall it is positive, with some real growth in the past couple of years. This growth is primarily driven by strong commodity prices and demand for their services. As North American drilling slows down and there is less product to ship, revenue may be at risk. The strong growth we have seen may not be able to continue as dramatically.

Revenue projections:

Being conservative, but not too conservative, a revenue growth rate must be extrapolated to project a revenue number 5 years from now. This will not be an exact science but will provide us with a projection of what revenues you can expect the company to generate in the future. This is important because it is revenues that lead to earnings. One important thing to consider is whether revenue growth is accelerating or decelerating – this helps make a judgment call on what growth rate to apply.

Historical Growth Rates:

Enbridge’s revenue growth rates have been pretty consistent over the past 10 years, with real strong growth in years 1 to 5. This is positive revenue growth. As I mentioned above, we are just coming out a real strong period for energy stocks, and with North American drilling looking to be down, there may be some pressure on ENB in the near future. However, if we see a revenue trend like this in 10 years time, the stock should perform well. Based on this revenue growth data, I have chosen to project revenue to grow at 10% which would mean, at the end of 2011 the revenue for ENB will be approximately $17,143 million per year.

EPS Profile and Projection:

I want to now move onto looking at the company’s earnings per share – how well the company turns those revenues into earnings for shareholders. To pass the EPS test, the company must possess the following two attributes:

1. a steady and consistent EPS uptrend
2. the ability to continue to grow EPS in the future

The EPS profile:

The EPS profile for ENB is presented below and again it shows growth, but with some bumps along the way. I would prefer to see a more flat uptrend without all the choppiness in the trend line. The company appears to struggle turning their revenue growth into positive earnings each and every year. However, the earnings trend is up which is positive.

EPS projections:

Just as with the revenue projections, being conservative, but not too conservative, a EPS growth rate must be extrapolated to project a revenue number 5 years from now. This will not be an exact science but will provide us with a projection of what EPS you can expect the company to generate in the future. Again it is important to consider whether EPS growth is accelerating or decelerating – this helps make a judgment call on what growth rate to apply.

Historical Growth Rates:

The EPS growth rates are pretty consistent – nothing too drastic over different periods of time. Earnings growth does appear to have dropped off from the 10 year average. The 5 year average was down but also seems to have picked up again in the last 2 years. I think we need to be a bit more conservative on the projected growth rate as a result of this. As such, I have estimated that the 5 year earnings growth rate for the company to be at 9%. At the end of 2011 the EPS for ENB will be approximately $2.75 per year.

Dividend History:

As a dividend investor, I of course look at dividends. Usually, I already know at this point that the company at least pays a dividend and has a strong history of increasing their dividend payouts on a consistent basis. The only analysis I do on dividends at this point is to quickly look at the dividend history over time. I want to see at least 10 years of uninterrupted and growing dividend payments to shareholders. Here is ENB’s dividend chart:

This is a thing of beauty. The dividend has gone up every year since at least 1996. The company’s current yield of 3% is also attractive. However, it is still lower than the yield of the iShares Dow Jones Select Dividend Index (DVY) the yield you would get is 3.60, so I need to be sure that the opportunity for share price growth is there as well before buying into the company.

Share Price Valuation:

I use 2 methods to compare a company’s share price. The first is looking at the dividend yield to see how the current yield compares to the 10 year average yield for the company. The second is determining a buy range for the stock through the analysis of the recent price for $1 of EPS in relation to historical prices. Here is my results of my valuation.

Dividend Yield

Current Dividend Yield: 3.0%
Average Dividend Yield for past 10 Years: 3.60%
Is the current dividend yield higher than the average dividend yield for past 10 years:No

With an average dividend yield over the past 10 years of 3.6% and a current yield of 3.0%, the stock seems a bit expensive. Typically I look for the current yield to be higher than the average yield.

Buy Range

Recent Price (how is the current price sitting in relation to historical averages):

EPS Projected Growth Rate: 9%
Recent P/E ratio: 20.7 (= current stock price dividend by current year projected EPS of $3.99)
Relative P/E ratio: 1.19 (= recent P/E divided by 10 year average P/E)

Based on a relative P/E of 1.19, buying the company today would indicate that we are buying a price at a premium over the 10 year historical P/E value (approximately 19%). I would prefer the relative P/E to be closer to 1.0.

Upside Price (based on the EPS projection, what price might we expect if the growth continues on the trend we saw in our analysis of revenue and EPS):

Upside price: $55.28 (= upside EPS in 5 years X upside P/E ratio in 5 years)
Upside P/E ratio: 20.1 (= 10 year average high P/E ratio)

Downside Price (based on the EPS projection, what price might we expect if the growth continues on the trend we saw in our analysis of revenue and EPS):

Downside price: $32.32 (= current price – (1 – 20% decline))

Buy Range

The buy range for ENB is $32.32 to $39.97

This is calculated by:

(Upside Price minus – Downside Price) divided by 3 = $7.65 which is the size of the buying zones I use (buy/wait/sell). The buy zone is simply the downside price plus the zone size.

Summary

Based on ENB’s current price of $40.40, I would not be buying this stock at this time. The revenue profile looks good, earnings could be better but is not bad, and dividends are spectacular. I am going to keep this on my radar screen and may buy when it drops below $39.

Disclosure: The Dividend Guy does not own shares in ENB. This is my analysis of the stock and is not investment advice. Do your own research.