As is typical at this time of the year, Enbridge (ENB) held its annual investor conference. While there is still plenty to be optimistic about, there was reason for caution. Regardless, I remain bullish on the company’s potential. (See Analysts’ Top Stocks on TipRanks)
Low Dividend Growth
Let’s start with the biggest news from the investor’s conference – the lower than anticipated dividend raise. Enbridge’s historical dividend growth rate is in the high single digits. While the expectation was that this would slow, the company still expected the dividend to be growing in line with distributable cash flow (DCF). In last year’s presentation, Enbridge had a targeted DCF compound annual growth rate (CAGR) of 5-7% growth through 2023.
Last year, the dividend was only raised by ~3%, and while disappointing, we were in the middle of a pandemic, and we did see many companies take a cautious approach to dividend raises. What about this year’s raise? It was another lower-than-average raise.
Enbridge announced it raised the dividend to C$0.86 per share from C$0.835 previously. Unfortunately, this 3.09% raise did little to excite shareholders.
While disappointing, the raise is in line with DCF growth. In Fiscal Year 2021, the company’s outlook called for DCF of C$4.70-C$5.00 per share, equal to 3.9% at the mid-range. After Q3 results, it remains on track to achieve said guidance, and as a result, investors shouldn’t have been expecting any more than that.
The real issue is that DCF is not tracking in line with the company’s 5-7% target. It has now fallen short of that in two consecutive years. Despite this, it is not backing down from this outlook. At the company’s recent investor day, management re-iterated DCF’s CAGR of 5-7% and extended it through 2024.
This will be a very important year for Enbridge. Can it achieve this stated target? If the company comes up short again, then another re-iteration of the same guidance won’t mean much to investors.
It is also worth noting that Enbridge has a targeted payout ratio of 60-70% of DCF. Through the first nine months of the year, the payout ratio stood at 67%. Although a little on the high end, it’s still comfortably within its targeted range.
While the dividend news may have been a little disappointing, news of a $1.5 billion normal course issuer bid program was welcomed.
Management also announced Fiscal Year 2022 guidance. The company expects to achieve an EBITDA of $15-15.6 billion and DCF per share between $5.20 to $5.50.
Dividend Is Safe
These numbers are largely in line with street expectations for EBITDA of $15.5 billion and DCF of $5.33 per share. Should the company achieve DCF targets, it will be looking at approximately 10% growth in Fiscal Year 2022.
At those levels, the company’s DCF payout ratio would drop to 64% based on the new quarterly dividend of $0.86 per share. What does this mean? Likely a return to 5-7% dividend growth next year. It also should reassure investors that the dividend is more than adequately covered.
All in all, it was a neutral event. Investors will want to pay close attention to DCF and how it is tracking against estimates over the next few quarters. At the end of the day, the company’s performance will be measured against its ability to meet guidance.
Wall Street’s Take
Turning to Wall Street, Enbridge earns a Strong Buy consensus rating, based on 10 Buys and three Holds assigned in the past three months.
The average Enbridge price target of $45.30 implies 19.9% upside potential.
Disclosure: At the time of publication, Mat Litalien had a long position in ENB.TO
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