Enbridge Grows its Pipeline to Profits

12/14/2011 11:19 am EST

Focus: INCOME

John Heinzl

Reporter and Columnist, GlobeInvestor.com

For more than a decade, the Calgary-based company has delivered steady annual increases to shareholders, writes John Heinzl, reporter and columnist for The Globe and Mail.

Scan the top holdings of dividend funds, and its name pops up over and over: Enbridge (ENB) has become a core holding for Canadian and US income investors, and it’s easy to see why.

For more than a decade, Canada’s biggest pipeline operator has been a model of dividend growth, delivering steady annual increases to shareholders. The most recent hike came on December 7, when the Calgary-based company boosted its quarterly payment by 15%, effective March 1.

A 15% bump is nice, but to appreciate the power of Enbridge’s—or any company’s—dividend growth, you can’t look at a single increase in isolation, just as you can’t measure an athlete’s ability by a single goal or game. You need to go back and look at the entire highlight reel, which is what we’re going to do today with Enbridge.

Ready? Let’s rewind to 2001.

Imagine you invested $10,000 in Enbridge shares ten years ago, and you held the shares in a dividend reinvestment plan (DRIP) that permits fractional share purchases. In other words, every penny of your dividends would buy more shares, which in turn would produce more dividends.

Back on December 7, 2001, Enbridge’s shares closed at $42.75, and the annual dividend was $1.40. The stock has split twice since then, so to make the 2001 numbers comparable to today’s, we’ll need to divide the dollar values by four. That gives us a share price of $10.6875 and annual dividend of 35 cents, respectively.

Now, fast forward ten years. On December 9, 2011, Enbridge’s shares closed at $36.68 and—after ten consecutive increases—the annual dividend has more than tripled to $1.13.

How much would your initial $10,000 investment be worth today? Well, based on the share-price appreciation alone, you would have $34,320. That’s pretty good.

But including reinvested dividends, your initial $10,000 would have grown to $47,834. This works out to a return of 16.9% annually, more than double the S&P/TSX’s total return of 7.6% over the same period.

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Granted, anyone can choose profitable stocks in hindsight, and Enbridge’s returns are exceptional. But it’s also true that Enbridge—a company I own—has been a top pick of conservative dividend investors for years, thanks to the predictable nature of its earnings from energy businesses that are either regulated or supported by long-term contracts.

The point here is to illustrate that by harnessing the power of dividend growth, dividend reinvestment, and compounding, an investor can achieve impressive returns.

Given Enbridge’s performance, it might be tempting to think the stock’s best days are behind it. Robert Cable, director of wealth management with ScotiaMcLeod, owns Enbridge shares personally and in client accounts, and while he thinks the stock may be a bit expensive right now at about 22 times next year’s estimated earnings, he’s not selling.

"They’re going to raise their dividend again next year. You can see it coming. Their cash flow is going to be up," he said. "So who cares what the market does? If the share price drops, great. My dividend reinvestment just gets me more shares."

Enbridge is also striking a confident tone about the future. With about $11 billion of projects coming into service between 2010 and 2015 in its oil sands, conventional pipelines, natural gas, and renewable energy businesses, the company expects earnings per share (EPS) to grow by about 10% annually through the middle of the decade, based on "conservative assumptions."

While environmental delays and oil spills are always a risk with pipeline companies, Enbridge’s earnings forecast augurs well for dividend investors. On the 2012 guidance conference call, chief executive officer Patrick Daniel said Enbridge’s future dividend growth will be "commensurate with EPS growth," which would allow the company to maintain a dividend payout ratio of between 60% and 70% of earnings.

It’s telling that Daniel opened his remarks on the call with a reference to Enbridge’s latest dividend increase, and stressed that "we have never, in our more than 55 years as a publicly traded company, reduced the dividend to shareholders."

Don’t expect him to start now.

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