Dividend Stocks

Buy List stock for November 2023: TD Bank (TD.TO / TD)

A stock that remains on my buy list for November is Toronto-Dominion Bank (TD.TO/TD). I look at TD as a core holding, because it meets all my investment requirements and it’s a stock that I would hold for a long time, while reviewing it quarterly for good measure. Here’ why.

TD has a very lean structure that plays a significant role in its expansion. It also has a solid dividend growth history, and management recently rewarded shareholders with several dividend increases. Plus, it has a significant presence in the US compared to other Canadian banks.

TD.TO Business Model

Toronto-Dominion Bank operates as a bank in North America. TD’s segments include Canadian Personal and Commercial Banking; U.S. Retail; Wealth Management and Insurance; and Wholesale Banking.

Canadian Personal and Commercial Banking offers a full range of financial products and services to approximately 15 million customers in Canada.
S. Retail offers a range of financial products and services under the brand TD Bank, America’s Most Convenient Bank. It also TD Auto Finance U.S., TD Wealth (U.S.) business.
Wealth Management and Insurance provides wealth solutions and insurance protection to approximately six million customers in Canada.
Wholesale Banking operates under the brand name TD Securities and offers a range of capital markets and corporate and investment banking services to corporate, government, and institutional clients.

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TD Investment Thesis

Over the years, TD has increased its retail focus, driven by lower-risk businesses with stable, consistent earnings. The bank enjoys the largest or second largest market share for most key products in the Canadian retail segment. TD keeps things clean and simple as the bulk of its income comes from personal and commercial banking. It has sizeable exposure in major cities like Toronto, Vancouver, Edmonton, and Calgary, combined with a strong presence in the US.

With about a third of its business coming from the U.S., TD is the most “American” bank you’ll find in Canada. If you are looking for an investment in a straightforward bank, TD should be your pick as increasing retail focus, large market share in Canadian banking, and U.S. expansion are key growth enablers for TD Bank. The 13% stake in Charles Schwab (SCHW) is another interesting growth vector.

TD.TO Last Quarter and Recent Activities

In August, TD reported a disappointing quarter with net income down 2% and EPS down 5%, but it could have been worse. TD’s results were affected by amortization charges, acquisition & integration costs, the termination fee of the acquisition of First Horizon, and strategy costs to reduce the interest rate impact on their balance sheet.

We do like a proactive bank that takes steps now instead of doing what US regional banks did a few months ago, which was nothing! Canadian Personal and Commercial Banking net income was down 1%, mainly due to higher provisions for credit losses (PCLs). US retail was down 9%, hurt by higher PCLs and termination fees on the acquisition. Wealth Management & Insurance was down 12% while Wholesale was flat. TD also announced a 5% share buyback program.

There weren’t any news about TD in October, so we are patiently waiting for the end of November to look at their earnings!

Potential Risks for TD Bank

The housing market has been a concern since 2012. However, TD seems to be managing its loan book wisely and the Canadian economy has been remarkably resilient as well. A higher insured mortgage level in the prairies seems adequate while TD continues to ride the ever-growing downtown Toronto housing market tailwind. As interest rates rise, TD’s loan book will profitably generate stronger income. However, this also comes with increased risk of defaults and slow volume growth.

TD must identify other growth vectors because consumers can’t borrow continuously, even more so with higher interest rates slowing down the economy. It is important to follow the bank’s provision for credit losses, which have risen in the latest quarters. So far, everything is under control, but a recession still looms. In early 2023, TD paid $1.6B in a settlement related to a Ponzi scheme (Stanford Litigation Settlement). While this is treated as a one-time event, it still affected their quarterly earnings report.

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TD.TO Dividend Growth Perspective

TD is a Canadian dividend aristocrat (which allows them a “pause” in their dividend increase streak). TD shareholders were lucky enough to enjoy a dividend increase in early 2020 (+6.8%), right before regulators forced a break in dividend growth. In 2021, the bank rewarded investors with a 12.7% dividend increase. It returned with a more regular increase in 2022 (+7.8%). Going forward, you can expect a mid-single-digit dividend increase as payout ratios are quite low and TD is well capitalized.

For more about dividend aristocrats and the paused dividend growth for Canadian banks, listen to my podcast.

Graph showing steadily increasing dividend payments for TD Bank over years, except when regulators forced pause during pandemic — Steady dividend growth except when regulators imposed a pause

Final Thoughts on this Buy List Stock

Its legal settlement early this year and the general economic landscape may have seemingly taken some of lustre away from TD, but it has a lot on offer for dividend-growth investors. A lean structure conducive to expansion; growth potential through its focus on Canadian retail banking, its US exposure, and its stake in Charles Schwab (SCHW); and dividend growth.

We have TD in the DSR retirement and 500K portfolio models, for both Canada and the US. A stock to consider if you’re looking for holdings in the financial sector.

Market-Beating High Yield Canadian Stocks

High yield Canadian stocks that beat the market? Yes, here are some examples. After writing so much about the virtues of low-yield, high-growth stocks, it’s time to talk a bit about high-yield stocks. To be fair, they’re not all bad investments. Some provide a fairly sustainable source of high income for investors, and some even manage to beat the market!

High yield Canadian stocks that keep giving

I searched for high yield companies that also matched the overall stock market performance of late. On October 7, the iShares S&P/TSX 60 ETF (XIU.TO) 5-year total return (capital + dividends) was about 52% and the SPDR S&P 500 ETF Trust (SPY) was about 74%. So, I search for all companies generating a total 5-year return of at least 50% and a yield of at least 6%; this returned 101 stocks.

Here are three of the Canadian stocks that provided high yields while matching or outperforming the market for total return over the last 5 years. Caution: there’s no guarantee that they will keep performing that well in the future, especially with a long-predicted recession looming. As always, do your due diligence when considering any investment.

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Capital Power (CPX.TO) 6.03%, +89.62%

Not long ago, Capital Power was a darling as its stock price defied gravity while other utilities were doing down. While the market has some reservations about utilities due to their sensitivity to interest rates, CPX continues to show a relatively strong dividend triangle. Management increased the dividend from $0.58/share to $0.615/share. A 6% increase in the middle of an “interest rate crisis” is bold and shows strong confidence.

CPX is dependent on Alberta’s economy, where it generates 56% of its electricity and 62% of its revenues. That is a concern. It means its share price tends to move up and down with the oil market. As a capital-intensive business, CPX must invest heavily and continually to generate cash flow. The market might not like additional debt to fund projects in the coming years. With interest rates rising, this debt could become a burden and obtaining liquidity from capital markets might get more difficult. Finally, weather variations can affect results as seen recently when a warm winter reduced AFFO.

Considering its wind energy projects and the robust economy in Alberta, CPX expects to increase its dividend by 6% through to 2025, welcomed news for income seeking investors. Through its successful transformation into a more diversified utility company, CPX is earning its place among robust Canadian utilities such as Fortis, Emera, and the Brookfield family.

Enbridge (ENB.TO), 7.90% yield, +50.20%

I smiled at the 50% total return for Enbridge as I remembered buying it in 2017 and selling at the beginning of 2023 with a good profit. ENB is a good example of a deluxe bond that could eventually evolve into a dividend trap!

With inflation and higher interest expenses, Enbridge faces higher operating costs. This could seriously jeopardize growth because ENB can’t find any growth vectors without getting into more debt. In September 2023 ENB announced it was taking on more debt and issuing shares to acquire a gas transmission business for $19B CAD. I like the predictable cash flow it’ll bring, but I’m concerned about the ever-increasing debt level.

Total long-term debt stands at around $80B, up from $67B in 2017; it’s time to see some debt repayments. ENB’s interest expenses are continuing to increase, and it won’t end any time soon. Since building and maintaining pipelines requires significant amounts of capital, ENB may find itself in a position where cash is short.

Enbridge operates high-quality assets, with almost impenetrable barriers to entry. There’s no doubt the business model is solid. The problem is the rising debt level. ENB won’t be able to rely on its pipelines forever; many projects were revised or paused by regulators over the past few years. TRP’s latest Keystone pipeline spills remind us of the environmental risks of this industry.

ENB has paid dividends for 65 years, with 28 consecutive years with a dividend increase. Further dividend growth is expected at around 3%. Management aims to distribute 65% of its distributable cash flow, keeping enough for CAPEX. Consult their latest quarterly presentation for their payout ratio calculation.

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Labrador Iron Ore Royalty Corp (LIF.TO) 8.89% yield, +101.4%

LIF receives a 7% gross overriding royalty on iron ore products sold by Iron Ore Company of Canada, a producer and exporter of iron ore pellets and high-grade concentrate. The mine enjoys a high-quality source of products with sufficient inventory to support future expansion. IOC is well-positioned strategically due to the high quality of the iron ore and its ability to produce higher margin pellets.

LIF’s business model depends on factors that are barely in its control; commodity prices, unions, and demand that can affect production of the underlying business. Since we only have data from 2010, we have yet to see how LIF will navigate a recession. However, we can see the effect of an iron spot price decline, and how quickly it happens, as it did in 2022.

The company must keep a large cash reserve for additional CAPEX. After all, the royalty-based business is only good if you have high-quality assets. The narrative has been quite enticing as LIF surfed on the highest iron prices in its history, and demand seemed stable. Things took a turn, and both the stock price and dividend dropped.

LIF pays a variable dividend: base payment of $0.25/share quarterly + special dividend based on royalties received. You can’t expect a stable dividend, but a yield usually in the high single-digit to double-digit! The generous yield is inflated by the royalty payments.

When iron ore trades at a high price, LIF seems the most generous stock in town. The opposite is also true. Demand for iron ore will come and go, affecting its price, and, therefore, your dividends. It’s not a bad investment if you’re able to stomach the price and dividend fluctuations.

Last thoughts about high yield Canadian stocks

As you know, I prefer higher total return over high yield. Overall, low yield high growth stocks provide higher total return, so I favor them for my dividend growth investment strategy. However, a few solid higher yield companies that match or exceed the market can be good assets to have in a portfolio. Be sure to monitor them quarterly though, to ensure they don’t become dividend traps!

What’s Happening with Renewables?

What’s happening with renewables? Renewable stock prices dropped spectacularly in the last few weeks, as shown here. If you have renewable energy stock in your portfolio, you might be in shock.

What caused that chaos?

It’s not a dividend cut or an absence of dividend growth. On September 27, NextEra Partners (NEP) lowered its guidance for the growth of its distribution per unit from 12%-15% per year down to 5%-8%, with a target growth rate of 6% per year. The CEO explained the reasons in this press release. NEP’s distribution rose 89.78% over the past 5 years with an annualized growth rate of 13.67%.

Earlier in May, NEP had announced a strategic shift by confirming its intention to sell its natural gas pipelines.

The goal of selling assets and lowering the dividend growth policy is to give NEP more financial flexibility and maintain its ability to invest in new projects to pursue growth. It’s also to pay off debts that are coming due.

NEP’s debt

Companies can use debt or issue more stocks/units to finance projects. Convertible Equity Financing Portfolio (CEFP) is a way to get financing where you pay the debt either in cash or in units when it comes to maturity.

NEP uses a mix including convertible equity financing; it gets money “today”, betting that its unit price goes up before the debt comes to maturity, thus getting a good deal by issuing units at a higher price to pay it off. NEP has roughly $1.5B of convertible equity financing debt to pay off through 2025. With the stock dropping nearly 60% recently, you can count on them not issuing additional units for near term financing.

This highlights how sensitive most renewable utilities are to rising interest rates. NEP is stuck between a rock and a hard place. Future debt will carry interest rates of 7%-8% while issuing units with such a depreciated stock price would only drive the price lower by diluting shareholders’ investments.

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What’s next for NEP?

NEP is walking is on the edge, but that doesn’t mean it’ll fall. Numbers seem to work until 2025, assuming no further major interest rate hikes. However, it’s not out of the woods.

The pessimistic scenario has NEP facing higher interest rates while its unit price doesn’t bounce back. NEP would eventually face a possible dividend cut or see NextEra Energy (NEE) buy all its units. A leader in renewable energy with a market cap of $97B, NEE owns 51% of NEP, whose market cap is $2B. NEP shareholders wouldn’t be happy with this outcome because they wouldn’t get much for their units.

The optimistic scenario sees NEP on the edge for a few years, with interest rates decreasing before 2026, when more debt (including CEFP) comes to maturity. We’d see NEP’s unit price slowly but surely go up, the dividend paid, and growth back on the table. At this point, however, NEP would be a high-risk, high-reward investment.

What about other renewable utilities?

Now’s the time to make sure you have a solid portfolio. This implies digging deeper to ensure companies you hold show strong financial metrics. Unfortunately, utilities aren’t easy to analyze; they use both GAAP (generally accepted accounting principles) and non-GAAP (like homemade calculations), and often use Funds from operations (FFO) per unit, found in press releases and quarterly earnings reports.

Look for investors’ presentations and quarterly earnings reports on the company website. Doing that reveals that another renewable, Brookfield Renewable (BEPC/BEPC.TO), hosted its investors day in September. Contrary to NEP, BEPC reaffirmed its growth expectations and distribution growth targets…business as usual for BEPC.

Different companies, different business models, different debt structures. When a NEP-like situation happens, solid companies are also punished, unfairly, because the market puts them in the same basket as the one with the problem.

It’s clear that all utilities will suffer for a while. Higher interest charges hurt their balance sheet and cash flow, while simultaneously drawing retirees to bonds and GICs and away from utilities. In fairness, when 10-year government bonds offer over 4.5%, income-seeking investors would be fools to go for stocks paying the same yield.

How to look at renewable utilities

First, ignore the noise, or you’ll get lost in a myriad of conflicting information. Here are three articles on Seeking Alpha for October 6 (Strong Buy, Sell, and Hold ratings).

I read all three; each makes solid points. If I rely on their opinion, I have no clarity.

Best to develop your own opinion. How? Follow the same process as always: make sure your investment thesis (the narrative) is backed by the numbers.

1 – Start with the dividend triangle.

The EPS won’t be of much use for utilities; review the revenue and dividend growth trends.

Weak dividend growth, or none, raises a huge red flag. If you’re choosing between two stocks and one shows no or weak dividend growth, eliminate it as a candidate.

2 – Look at the FFO/unit (common replacement for EPS for utilities) on the company’s website.

3 – Look at the company’s debt structure and maturity in its investor presentation.

There’s a big difference between fixed-rate debt over a long period of time vs. floating rates or short-term maturities that will push interest expenses higher.

4 – Look at the company’s past track record to see how it performed in other difficult periods. You’ll have to go back to the 2008 crisis to see how they fared, but it’s time well spent if you’re unsure of some stocks.

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Renewables aren’t dead, just facing substantial headwinds

Renewables are facing stronger headwinds than classic utilities due to their business model. Many classic utilities—Fortis, Canadian Utilities, Xcel, and WEC Energy—operate regulated assets. They’re granted a monopoly over an area to ensure quality, stable service. In exchange for that monopoly, utilities cannot raise their rates as they see fit. They must present a case for increasing rates to the regulator, who assesses whether the increase makes sense for both the utility and its customers. When interest costs increase, regulated utilities have more pricing power because it’s easier to justify rate increases.

Renewables don’t enjoy a monopoly because their energy source is less stable and complements other sources. They can raise prices freely, but they face more competition. In the current economic environment, I bet they’d love to negotiate rate increases with a regulator!

Renewables and other capital-intensive businesses (Telcos, REITs, pipelines, etc.) will have a rough ride until we know that interest rate increases are over and that we’re heading toward reductions. We’re not there yet; you must decide if you want to “walk in the desert”. Again, focusing on dividend growers helps.

DDM Stock Valuation to Compare Stocks

One of the most debated topics among investors is how to assess the value of a stock. I like to use stock valuation models like the Dividend Discount Model (DDM) to compare similar stocks I have already thoroughly analyzed and find interesting, to see which one might be the best deal.

I don’t use valuation to determine if the company is undervalued or not because, to be honest, your guess is as good as mine. If you put ten financial analysts in a room and ask them to determine the valuation of a company, you’ll likely end up with ten materially different answers.

They’re all smart folks, but each of them has a different perspective. However, using a valuation tool with the same perspective and applying it to two or more companies in the same sector makes it easier to identify which one is the best deal and the best fit with my investment thesis.

To clarify this process, let’s compare two Canadian banks: Royal Bank (RY.TO) and National Bank (NA.TO).

Analyzing RY.TO and NA.TO

Before looking at the fair value of Royal Bank and National Bank as per the DDM, any investor interested in them should analyze both; study their business model, look at their dividend triangle, evaluate the safety and growth potential of their dividend, identify their growth vectors and their risks. For details about what I do to analyze stocks, read this article.

Our diligent investor might summarize the analysis like this:

Business model:

Both RY and NA are regulated and diversified Canadian banks
RY is much larger than NA ($181B market cap vs. $35B)
RY is more distributed geographically than NA, which is heavily concentrated in Quebec

Dividend triangle, dividend safety and growth:

Both banks have a strong dividend triangle showing growth in revenue, EPS, and dividend
NA shows slightly faster dividend growth since early 2022 and higher growth numbers over 5 years for all three metrics
Dividend payout ratios are under control for both, with RY near 45% and NA near 37%

Growth vectors:

RY has diversified revenue streams and is increasing its activities outside Canada
RY targets growth in wealth management, capital markets, and insurance, with this trio already representing over 50% of its revenue
NA follows a growth by acquisition strategy, targets wealth management and capital markets
NA is more flexible and quicker to move due to its smaller size

Risks:

RY capital markets and insurance growth vectors are inclined to variable returns
RY has high exposure to Canadian housing market and the effects of rising mortgage rates
NA is dependent on the Quebec economy, although it has been expanding with private banking in western Canada and investments in emerging markets, such as the ABA bank in Cambodia
NA takes more risks to find growth vectors

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With all this analysis information on hand, our investor still hesitates between Royal Bank and National Bank and now turns to the DDM valuation to compare them.

Comparing NA.TO and RY.TO Valuation

Here is the DDM valuation data for both Royal Bank and National Bank taken from their respective stock cards on the DSR website.

At the time of writing, National Bank was trading at about $103 per share and Royal Bank at around $131.00 per share.

Looking at this data to compare both banks, including the value circled in red for each bank, observe the following:

	RY	NA
DDM Intrinsic value	$190.80	$99.77
Current stock price	$131	$103
Stock currently trading at	45% discount	3% over its value

At 45% discount, RY looks like an amazing deal, a slam dunk, right? It certainly does, but…there is a crucial difference to understand here, which is the discount rate. The discount rate, also known as the “expected return”, represents the minimum acceptable rate of return that an investor expects to earn on their investment to compensate for the risk and opportunity cost of investing in that particular stock.

Compare Apples to Apples

Notice below that the discount rates used for the intrinsic value of RY and NA are not the same. Due to RY’s geographic distribution and revenue stream diversification mentioned earlier, we used a discount rate of 9%, whereas NA’s more audacious approach made us use a 10% rate.

If we compare both banks with the same discount rate of 10%, we see that the difference between the two is significantly reduced.

	RY	NA
DDM Intrinsic value	$143.10	$99.77
Current stock price	$131	$103
Stock currently trading at	9% discount	3% over its value

If you hesitate between RY and NA, a look at the DDM value confirms that your dilemma is between two really good stocks. RY might seem a better deal at current prices, but NA could be a better pick if you want more growth potential and are prepared to live with more volatility in the stock price.

I have both Royal Bank and National Bank in my portfolio because both fit my investment thesis. I appreciate National Bank’s significant growth potential and Royal Bank’s more stable and steady approach. As a reliable source of income that also shows growth vectors, RY.TO is also included in the DSR Canadian retirement portfolio model.

Buy List Stock – July 2023: CCL Industries (CCL.B.TO)

If you’re looking for a strong Canadian stock in the materials sector to add to your buy list, take a look at CCL Industries. The world’s largest producer of pressure-sensitive and specialty extruded film materials, CCL offers products and solutions to address decorative, packaging and labelling, security, loss prevention, and inventory management needs.

A global presence, CCL employs over 25,000 people in 200 production facilities in 43 countries. Its revenues come from North America (41%), Europe (32%), and Emerging Markets (27%).

CCL Business Model

Operating through four segments, CCL Industries sells its solutions to global corporations, government institutions, small businesses, and consumers.

The CCL segment converts pressure sensitive and specialty extruded film materials for a range of decorative, instructional, functional and security applications.
The Avery segment supplies labels, specialty converted media and software solutions.
The Checkpoint segment develops radio frequency (RF) and radio frequency identification (RFID) based technology systems for loss prevention and inventory management applications, and labeling and tagging solutions, for the retail and apparel industries.
The Innovia segment produces specialty and layered surface engineered films for label, packaging, and security applications.

Investment Thesis

An international leader with a well-diversified business that is based in Canada is a rare find. With its 2013 major acquisition of business units from Avery, the world’s largest label producer, the company set the tone for several years of growth. Bolstered by its earlier success, CCL also bought Checkpoint and Innovia, and it keeps making more acquisitions.

CCL is still able to generate organic growth (roughly 4-5%) on top of its growth through acquisitions. You can rest assured that management’s interests are aligned with yours since the Lang family still owns 95% of CCL’s A shares with voting rights. We appreciate CCL’s capital allocation that includes a mix of dividend, share buybacks, acquisitions, and CAPEX. With its attractive PE ratio, CCL can generate more growth through acquisitions.

CCL’s Last Quarter and Recent Activities

CCL reported a strong first quarter in 2023; revenue up 9% and EPS up 12%, with organic growth of 1.4%, acquisition-related growth of 3% and a 4.2% positive impact from foreign currency translation. Sometimes, doing business across the world works out! By segment, CCL sales were up 7.5%, Avery was up 44%, Checkpoint was up 3.6%, and Innovia was down 14%. In constant currency, the company saw high single-digit growth for revenue and earnings. It is looking good for the rest of the year!

In less than 30 days, in June and July 2023, CCL made three small acquisitions:

It bought Pouch Partners for $44M in an all-cash deal. Pouch Partners supplies highly specialized, gravure printed & laminated, flexible film materials for pouch forming, including recyclable solutions, with sales of $104M in 2022.
It announced the acquisition of Oomph Made for $7.1M. CCL said Oomph had sales of C$6.7M in 2022. This adds to Avery’s growing portfolio of access control, badging and credentials technologies, products, and brands focused on the retail, hospitality, live events, and conferencing markets.
It bought privately held Creaprint S.L., a specialist producer of In Mould Labelling (IML) with sales of $17M in 2022, for a debt and cash-free purchase consideration of $38.1M. This acquisition brings IML technology and expertise to global CCL Label operations.

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Potential Risks for CCL.B.TO

We often see rising stars such as CCL yielding a high return over a short period. In 2014, the stock traded at approximately $15, steadily rising to $62 in 2017, peaking at $72 in 2021, and now around the $66 mark. CCL is a leader in many sectors, but double-digit growth will be hard to achieve going forward.

The possibility of a recession is affecting investor interest for this stock. CCL used leverage for its acquisitions many times in the past few years. Further acquisitions to support growth might be riskier as many expect a global economic slowdown. CCL also faces inflation headwinds as the cost of raw materials continues to rise.

CCL.B.TO Dividend Growth Perspective

CCL shows a nearly perfect dividend triangle over the past 5 years, with strong revenue and dividend growth. However, earnings are beginning to slow down.

CCL’s business model is built on repeat orders generating consistent cash flows. With their low payout ratios, investors can expect dividend growth for many years. After a smaller increase in 2020, CCL roared back with yearly dividend increases of 17%, 14%, and 10.4% from 2021 to 2023. It will be interesting to see how CCL will grow its payouts going forward with EPS not growing as fast. With a payout ratio of 25% and a cash payout ratio of 35%, there is nothing to worry about.

Final Thoughts on CCL.B.TO

I look at CCL.B.TO as an educated guess; it’s almost perfect but I expect price fluctuations and I know the risks. As it operates in the cyclical materials sector, CCL faces potential headwinds from a looming recession and increased raw material prices. That being said, the dividend is safe, and the company can sustain dividend growth for several years.

If you are looking for a company focused on growth by acquisition, and you can live with fluctuations in this uncertain economic environment, CCL might be for you. Or you can keep CCL on your watch list while you wait to see how the economy evolves over the next months and quarters.

Enbridge, Is the 6% Yield Safe?

Summary

Enbridge offers a generous yield (6%), is it safe?
ENB is responsible for about 25% of crude oil and 22% of all-natural gas transportation in North America.
ENB generates substantial cash flow, and management is usually on target with its guidance.
Finally, regulators may not be as enthusiastic as Enbridge is regarding new pipeline projects.

My Investing Thesis

ENB’s customers enter 20-25-year transportation take or pay contracts. This means that ENB profits regardless of what is happening with commodity prices. ENB is also well positioned to benefit from the Canadian Oil Sands as its Mainline covers 70% of Canada’s pipeline network. As production grows, the need for ENB’s pipelines remains strong. Following the merger with Spectra, about a third of its business model will come from natural gas transportation. Enbridge has a handful of projects on the table or in development. It must deal with regulators, notably for their Line 3 and Line 5 projects. Both projects are slowly but surely developing. The cancellation of the Keystone XL pipeline (TC Energy) secures more business for ENB for its liquid pipelines. ENB now has a “greener” focus with its investments in renewable energy.

Business Model Explained to a 12 Years Old

What is nice about pipelines is that they are like a toll roads. The only difference is that you have no choice to take that road and pay the toll if you want to travel. The best part is that most Enbridge clients enter in 20-25 years transportation contracts. Therefore, no matter what happens, there are always people paying the toll. The cash flow is easy to predict in the future which leads to steady dividend growth.

Enbridge operates the longest pipeline in North America. The company recently merged with Spectra in order to create an energy infrastructure company. About 2/3 of ENB earnings is generated through oil sand (liquid pipelines) distribution while the other 1/3 is coming from natural gas transmission.

Source: Enbridge

Potential Risks

Stocks do not pay a high yield for no reason. ENB raised its debt and number of shares during the merger with Spectra and the integration of its partners a few years ago. The total long-term debt stands at around $76B (up from $67B in 2017) with no sign of being reduced. It’s time that investors see some debt repayment. As pipelines require significant amounts of capital to build and maintain, ENB may find itself in a position where cash is short. After all, management has plenty of projects to fund, a double-digit dividend growth promise to keep, and larger debts to repay. This could seriously jeopardize ENB’s growth plans. Many pipeline projects have been revised or paused by regulators over the past few years.

Dividend Growth Perspective

The company has been paying dividends for the past 65 years and has 27 consecutive years with an increase. Further dividend growth shouldn’t be as generous as compared to the past 3 years (10%/year). Management aims at distributing 65% of its distributable cash flow, leaving enough room for CAPEX. Look to their latest quarterly presentation for their payout ratio calculation. Management expects distributable cash flow growth of 5-7% annually. Therefore, you can expect a similar dividend growth rate. We have used more conservative numbers in our DDM calculation that are more in line with the 2021 and 2020 dividend increases of 3%.

An exclusive list of dividend growers with more potential…

Moose Markets presents the Canadian Dividend Rock Stars list: a selection of Canadian companies showing income and growth. You guessed it; we prefer a combination of dividend growth and dividend yield. The Canadian Rock Stars List is a selection of the safest dividend stocks in Canada.

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Disclaimer: I am long ENB in my Dividend Stocks Rock portfolios.