Enbridge Inc.

Enbridge Inc. (ENB, Toronto and New York)

RESEARCH SUMMARY

Report Author(s):

InvestorsFriend Inc. Analyst(s)

Author(s)’ disclosure of share ownership:

 The Author(s) hold shares

Based on financials from:

2023 Y.E.

Last updated:

April 20, 2024

Share Price At Date of Last Update:

 $                                  47.97

Currency:

$ Canadian

Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual):

But at $48.00

Qualifies as a stock that could be bought with confidence to hold for 20 years?

Yes

Has Wonderful Economics?

Good, yes

Has Excellent and Trustworthy Management?

Yes

Likely to grow earnings per share at an attractive rate over the next decade?

Yes

Positive near-term earnings outlook?

Yes

Valuation?

Attractive

SUMMARY AND RATING:  The graph of revenues per share (red line) shows volatility but this is driven by commodity price changes that have little impact on earnings. The graph of adjusted earnings per share shows modest recent gains.  The Value ratios would indicate a rating of Buy or (higher) Buy. Management quality appears very strong. The insider trading signal is positive. The outlook appears to be for continued modest growth. (That’s attractive on top of the 7.6% dividend). The economics of the business are good and would be very good if not for the purchased goodwill that pulls the return down. It has strong advantages in its installed base of pipelines that could not possibly be duplicated in today’s regulatory and environmental environment. Overall we would rate this as a Buy. It easily earns a place in the portfolio of Canadian investors who choose to own individual stocks.

MACRO ENVIRONMENT: The volume of energy and the earnings of Enbridge tend to remain quite stable. Higher interest rates are likely a modest a headwind.

LONG TERM VALUE CREATION: Enbridge has created very substantial value for investors in the long ter. The oldest price shown on Yahoo Finance is $3.66 in 1995. And it’s been around for many years before that. However the price is lower now than the peak of over $63 from 2015 — but the  attractive dividend offsets the loss for those that happened to buy at the peak. In any case, we are not paying $63 now.

DESCRIPTION OF BUSINESS: (Updated for the 2023 year-end figures) Enbridge is a huge pipeline company. It is mostly still an oil pipeline company despite other large operations. It operates primarily in Canada and the U.S. and is the largest North American pipeline company. Assets are massive at $181 billion. The break-out of its EBITDA by segment is as follows: Liquids (largely oil) pipelines61%, Natural gas transmission pipelines plus midstream 27% Gas distribution utility and storage 10%, Renewable power generation1%, Energy Services 0%. The geographic break-out of revenue is 54% Canada, and 46%. There will be modest revenues in Europe going forward from wind generation. Property plant and equipment is 46% Canada and 56% U.S. on a book value basis. This is a huge company with several dozen or more pipelines as well as other assets. See the annual report for more detail.

ECONOMICS OF THE BUSINESS: The economics are good but not spectacular  as evidenced by the 10.7% return on equity. Although the 28% return on tangible equity indicates a spectacular under-lying return. Look for steady and good returns from this company.

RISKS: There are various regulatory risks such as efforts to block major pipeline expansions and even to block replacing older lines. There are also various operation risks notably spills. See the annual report for more risks.

INSIDER TRADING / INSIDER HOLDING: Based on trades in the past year ending April 21, 2024: The insider trading signal is positive and there is strong insider ownership.

WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is  simple to understand and predict (marginal pass as its huge size and diversity leads to some complexity in understanding the business), has favorable long-term economics due to cost advantages or superior brand power (pass due to regulation and probably some near monopoly pipes or at least pricing power), apparently able and trustworthy management (pass), a sensible price – below its intrinsic value (pass based on reasonable P/E ratio), Other criteria that have been attributed to Buffett include: a low  debt ratio (marginal pass), good recent profit history (pass) little chance of permanent loss of the investors capital (pass) a low level of maintenance type capital spending required to maintain existing operations excluding growth (marginal pass)

MOST RECENT EARNINGS AND SALES TREND: Recent earnings per share growth averages has been essentially zero with a 0.5% drop in 2023.  Overall, earnings per share have been relatively flat since 2018 with only modest growth, although the growth in 2021 was strong.

COMPARABLE STORE SALES  OR INDUSTRY SPECIFIC STATISTICS: Not applicable.

Earnings Growth Scenario and Justifiable P/E: The P/E of 17 combined with a yield of 7.6% is pricing in little or no growth.

VALUE RATIOS: Analysed at $47.97. The Price to book value ratio at 1.9 seems reasonable but note that a large portion of the assets consisted of purchased goodwill such that price to tangible book value is expensive at 5.1. The price to earnings ratio is reasonable at 17.2. The return on equity is fairly good at 10.7% and is dragged down by the large amount of purchased goodwill. The return on tangible equity is very high at 28%. Over time the ROE should rise (all else equal) as goodwill becomes a smaller portion of assets due to organic growth. The dividend yield is very attractive at 7.6%. BUT, it is notable that the pay-out ratio was recently 124% of adjusted earnings, so the dividend is higher than GAAP earnings, but it seems it is not higher than cash flows. There has been only modest growth in adjusted earnings per share in the past several years. Intrinsic value is calculated as $49 if earnings per share and dividend growthy is only 2% for five years and the P/E falls to 15 (such as due to higher interest rates). And it’s $68 if growth is 5% and the P/E rises to 20. Overall, these value ratios would indicate a rating of Buy or (higher) Buy.

TAXATION FOR SHARE OWNERS: Nothing unusual. For Canadians the dividend tax credit applies.

SUPPORTING RESEARCH AND ANALYSIS

Symbol and Exchange:

Enbridge Inc.

Currency:

$ Canadian

Contact:

0

Web-site:

0

INCOME AND PRICE / EARNINGS RATIO ANALYSIS

Latest four quarters annual sales $ millions:

$43,649.0

Latest four quarters annual earnings $ millions:

$5,839.0

P/E ratio based on latest four quarters earnings:

16.9

Latest four quarters annual earnings, adjusted, $ millions:

$5,743.0

BASIS OR SOURCE OF ADJUSTED EARNINGS: As reported by management

Quality of Earnings Measurement and Persistence: High quality earnings (largely earned in cash). Although it should be noted that depreciation is a very large expense item and is a estimated figure. At times and in certain circumstances, depreciation could be under-stated.

P/E ratio based on latest four quarters earnings, adjusted

17.2

Latest fiscal year annual earnings:

$5,839.0

P/E ratio based on latest fiscal year earnings:

16.9

Fiscal earnings adjusted:

$5,743.0

P/E ratio for fiscal earnings adjusted:

17.2

Latest four quarters profit as percent of sales

13.2%

Dividend Yield:

7.6%

Price / Sales Ratio

2.26

BALANCE SHEET ITEMS

Price to (diluted) book value ratio:

1.87

Balance Sheet: As of Q2 2021.  As expected for a pipeline company, the bulk of the assets are classified as property, plant and equipment at 59% and a further 8% is largely minority ownership in other pipelines for a total of 68% in such hard assets. 20% of assets consist of purchased goodwill. 4% is in accounts receivable but it is notable that accounts payable are 5% and overall Enbridge has almost no need to invest in working capital. The remaining 3% of assets is other small items including software, inventory and cash. These assets are financed as follows 42% by debt, 34% by common equity, 5% by preferred shares, 7% by deferred income tax, 5% by accounts payable, 5% by “other long-term liabilities” (oddly, no note detailing these was found in the financial statement) and 1% by other liabilities. This is relatively strong balance sheet despite the presence of substantial purchased goodwill. That goodwill appears to have real value based on the achieved ROE.

Quality of Net Assets (Book Equity Value) Measurement: The book value is of good quality and real value. While 20% of the assets are in purchased goodwill, much of the assets are likely worth more than book value.

Number of Diluted common shares in millions:

                                  2,126.0

Controlling Shareholder: There is no controlling owner.

Market Equity Capitalization (Value) $ millions:

$101,984.2

Percentage of assets supported by common equity: (remainder is debt or other liabilities)

30.3%

Interest-bearing debt as a percentage of common equity

148%

Current assets / current liabilities:

0.8

Liquidity and capital structure: Relatively strong with a BBB+ credit rating.

RETURN ON EQUITY AND ON MARKET VALUE

Latest four quarters adjusted (if applicable) net income return on average equity:

10.7%

Latest fiscal year adjusted (if applicable) net income return on average equity:

10.7%

Adjusted (if applicable) latest four quarters return on market capitalization:

5.6%

GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE

5 years compounded growth in sales/share

-4.6%

Volatility of sales growth per share:

 Volatile with commodity prices but with little or no impact on earnings

X Years compounded growth in earnings/share

14.3%

5 years compounded growth in adjusted earnings per share

1.1%

Volatility of earnings growth:

 Not volatile and growing slowly.

Projected current year earnings $millions:

not available

Management projected price to earnings ratio:

not available

Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in (adjusted)  earnings per share?

No, but the dividend compensates for that to a good degree.

Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained:

-3.8%

More conservative estimate of compounded growth in earnings per share over the forecast period:

2.0%

More optimistic estimate of compounded growth in earnings per share over the forecast period:

5.0%

OUTLOOK AND AMBITIONS FOR BUSINESS: The outlook is for continued growth as they continue to invest and grow their assets.

LONG TERM PREDICTABILITY: Enbridge appears to offer a reliable dividend for the foreseeable future and seems likely to grow its earnings as well. In the very long term the decline of oil and gas as an energy source is likely to become a concern.

Estimated present value per share: We calculate  $49 if adjusted earnings per share grow for 5 years at the more conservative rate of just 2% (given the high dividend) and the shares can then be sold at a lower P/E of 15 and $68 if adjusted earnings per share grow at the more optimistic rate of 5% for 5 years and the shares can then be sold at a  higher P/E of 20. Both estimates use a 7.0% required rate of return.

ADDITIONAL COMMENTS

INDUSTRY ATTRACTIVENESS: (These comments reflect the industry and the company’s particular incumbent position within that industry segment.) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition based on the following four tests. Barriers to entry (Pass, there are huge regulatory barriers for and competitors attempting to build competing pipelines). No issues with powerful suppliers (Pass). No issues with dependence on powerful customers (Pass), No potential for substitute products (Pass, until and unless oil and gas becomes obsolete) No tendency to compete ruinously on price (Pass). Overall this industry appears to be attractive for Enbridge as a very large established incumbent.

COMPETITIVE ADVANTAGE: Enbridge has many monopoly -type assets which are mostly regulated as to the prices charged. And many of its pipelines have long-term contracts that set the price – some with inflation escalators. In its non-regulated operations it is also sometimes subject to fairly minimal competition.

COMPETITIVE POSITION: Through acquisitions and the giant 2017 merger with Spectra Energy (some involving large share issuances) and growth projects, Enbridge has become North America’s largest pipeline company.

RECENT EVENTS: They continue to increase assets and earnings through various additions to their current pipelines and some additional projects.

ACCOUNTING AND DISCLOSURE ISSUES: No big concerns were noted.

COMMON SHARE STRUCTURE USED: Normal, one vote per share.

MANAGEMENT QUALITY: Our impression is that management is very strong. They have been ambitious in pursuing acquisitions and have not had major stumbles to our knowledge. It appears that they have not run into big cost-overruns on construction projects. And in the case of the pipeline under the straight near Michigan there will be a cost overrun due to regulatory delays but it will ultimately be passed on to oil shippers.

Capital Allocation Skills: Strong, acquisitions and certainly organic capital spending has worked out well over the long term.

EXECUTIVE COMPENSATION: We will look into this  at a future time. But it’s unlikely to be any concern given the huge size of the company.

BOARD OF DIRECTORS: Warren Buffett has suggested that ideal Board members be owner-oriented, business-savvy, interested and financially independent. We will investigate this in a future update.

Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed  analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry.

DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice.

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