Enbridge Inc. Rate Reset Preferred Shares

Enbridge Inc. Series 9 4.4% Preferred (ENB.PF.A)
Author(s)’ disclosure of share ownership:  Author(s)  hold shares
Last updated: 27-Jun-19
Share Price At Date of Last Update: $15.81
Yield: 7.0%
Currency: $ Canadian
Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual):  (higher) Buy rated at $15.81
SUMMARY AND RATING:  These Enbridge Preferred shares (ENB.PF.A on Toronto) were issued at a price of $25.00 on March 13, 2014 paying 4.4% on a $25.00 amount ($1.10 per year).  Note that preferred shares can have customised aspects that affect their value. We have described the features here but we do not guarantee completeness or total accuracy of this description. For more detail consult the prospectus on sedar.com.  On June 27, 2019, they closed at $15.81 to yield 6.96% per year. If held in a taxable account, they are eligible for the dividend tax credit. The dividend is cumulative (if they skip a dividend due to financial difficulty, you may later still get that dividend). The dividend will reset every five years starting December 1, 2019 and will be set at the yield on the five-year Canada Bond at that time plus 266 basis points. They are currently trading at a spread of (a very hefty) 558 basis points over the 5 year Canada bond yield. Enbridge cannot redeem these shares before December 1, 2019, but on that date (and on each future 5 year anniversary) can redeem at $25. These preferred shares are subject to a market value decline if Enbridge’s outlook worsens and there is some potential for dividends to be skipped or for Enbridge to go bankrupt with no recovery of this investment. However we suspect that the possibility of such a scenario is quite remote. Enbridge’s web site indicates that these shares are rated PFd-3 (high) by DBRS. This is on a scale of 1 to 5 where 1 is the strongest.  Therefore these shares are rated as somewhat risky. If the  five-year Canada Bond  was to remain at its current level of 1.38%, then the reset dividend on December 1, 2019 would be 4.55% of $25.00 or $1.01 per year. That would be a yield of 6.39% on the current price of $15.81. These shares could decline if the Canada 5 year interest rate declines or if the market “spread” versus the Canada 5 year declines.  The market price also depends on the market yield on competing preferred shares. Bank rate reset preferred shares have lower yields. It’s debateable whether the higher expected reset yield on these Enbridge shares compensates for the added risk. Overall, we would rate these shares a (higher) Buy. Note that the current $1.10 per year dividend would decline to $1.01 at the current 5 year Canada bond yield and it is certainly possible that the dividend could be lower than that. They are best suited for investors who would be prepared to hold for at least six years (or even indefinitely) for tax efficient  yield.
INSIDER TRADING / INSIDER HOLDING: It does not appear that insiders hold these shares.
Symbol and Exchange: ENB.PF.A, Toronto
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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