Enbridge (NYSE: ENB) disappointed investors this year. Through mid-December, the stock was down more than 8%, though after factoring in its lucrative dividend, this year's loss shrinks to about 4%. That still represents significant underperformance compared to the red-hot stock market, which was up more than 20% this year.
Here's a look at the factors that weighed on Enbridge this year, and why that slump only makes the stock a more compelling buy for income-seekers.
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A wave of dilution weighed on results
Through the third quarter, Enbridge produced nearly 3.9 billion Canadian dollars ($3.3 billion) in available cash flow from operations (ACFFO), which is cash it could use to pay dividends. That was 36.7% more than it pulled in during the first three quarters of 2016, fueled by the acquisition of Spectra Energy as well as recently completed growth projects. That said, ACFFO on a per-share basis has declined 16.6% so far this year, though at the midpoint of its guidance range, Enbridge expects ACFFO/share to be about 8% below last year. The reason for this decline is that Enbridge sold CA$8.5 billion ($6.6 billion) of new stock over the past year to finance growth projects in addition to issuing nearly 700 million newly minted shares to buy Spectra Energy for CA$37 billion ($28.7 billion). That deluge of dilution has weighed on the stock this year because it pushed down the per-share metrics.
In addition to all the dilution, a more recent weight on the stock was Enbridge's decision to water down its dividend growth forecast in the near term. When the company announced the purchase of Spectra Energy late last year, it said that ACFFO per share would grow at a 12% to 14% compound annual growth rate through 2019. That would put the company in the position to deliver a 15% dividend increase in 2017 and 10% to 12% yearly increases from 2018 through 2024. However, a few weeks ago the company said that dividend growth would be at the bottom of that range through 2020.
One of the driving factors was Enbridge's desire to improve its balance sheet, which would lead it to sell CA$3 billion ($2.3 billion) in non-core assets next year. Further, it has identified a total of CA$10 billion ($7.8 billion) in non-core assets that it could sell in the future. By parting with those assets, it will slow the ACFFO growth rate, which means Enbridge would have less cash to boost the dividend.
Ready to reaccelerate
While Enbridge has tempered its growth forecast, the company still expects to expand at a rapid pace over the next few years. In fact, both its ACFFO and dividend growth rates of 10% annually through 2020 match rival TransCanada (NYSE: TRP), which is one of the fastest-growing large pipeline companies in North America.
Further, Enbridge expects a gusher of cash flow in early 2018 since it will have placed CA$12 billion ($9.3 billion) of growth projects into service by the end of this year. Those expansions, along with others it expects to finish in 2018, should push AFFCO up to a range of CA$4.15 to CA$4.45 per share ($3.22 to $3.46), which at the midpoint would be 15% higher than 2017. Meanwhile, ACFFO should reach CA$5 per share ($3.88) in 2020, fueled by additional expansion projects it expects to place into service in the next few years.
A better deal today for income-seekers
Enbridge's growth engine stalled this year because it issued boatloads of stock to fuel expansion. However, the pipeline company appears poised to hit the gas in 2018, which could provide the fuel needed to restart Enbridge's sagging stock price. That said, the currently lower price is what makes the company such a great buy right now since it sells for a dirt cheap valuation of 11.6 times 2018's ACFFO, which is well below the mid-teens multiple of both TransCanada and most other rivals. When we add the potential for Enbridge to make up that value discount, with its attractive 4.8%-yielding dividend and top-tier growth rate, it suggests that this company has the potential to reward investors richly in 2018 and beyond.
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