Nov 092017
 

tl:dr. The answer is yes, Enbridge is a good buy. 🙂

Fair Market Value of Enbridge (ENB) 

Canadian pipeline company Enbridge is currently trading at around $47 per share. But based on Benjamin Graham’s formula for valuing stocks, which I’ve discussed before, the fair market value of Enbridge should be around $62.

Enbridge stock’s EPS is $1.96. The growth rate (g) is 10.5% a year according to Nasdaq.com. And long term high quality corporate bonds currently yield 4.1%, which represents the (Y) variable in the equation above. So we can see that (1.96x(8.5+2×10.5))x4.4/4.1 = $62

$62 per share is in line with what most analysts have determined as well. For example TD Equity Research recently posted a 12 month target of $62 for Enbridge. Here is the full research paper for anyone interested. This indicates that ENB may be oversold right now.

If Enbridge climbs to $62 per share that would be a 37% increase in total return. That’s pretty darn good! 😀 This is why I believe Enbridge is potentially oversold right now and is a good buy. 😀 Over the past decade ENB dividends have increased by 10% annually. Enbridge plans to continue growing its dividends by at least 10% every year through 2024.

Enbridge has one of the strongest economic moats of any company. Since pipelines require a lot of capital and regulatory approval, it’s not an industry where anyone can easily get in. Much like the railway industry, it’s pretty much an oligopoly without much competition.

Using Stable Leverage to Invest in Enbridge

A couple of years ago I revealed one of my secrets to make money without doing much work. It’s called stable leveraging. The idea is to invest in pipeline companies using 100% borrowed money. I explained how it works in my previous post using a real life example with TRP stock.

How to Make $75 a Year with TransCanada Corp – TRP stock analysis

Enbridge stock has fallen about 15% from one year ago and is probably near a bottom. Using technical analysis we can see that Enbridge has a pretty strong support in the low 40s, which it hasn’t broken in many years. I think it’s better to buy when there’s a high probability of nearing a bottom than to actually try timing the exact bottom. 😉

The way I would approach stable leverage for Enbridge is to buy 100 shares of ENB stock using borrowed money at 2.5% interest rate from my brokerage account. ENB currently pays a 5.2% annual dividend. So after interest expenses I will earn $127 of dividend income every year. 😀 This strategy requires no maintenance, and $0 of my own savings. It’s almost like a free lunch. 😀

In order for an investment to meet my Stable Leverage standards it must pass 5 criteria.

  1. Publicly traded, large-cap, blue-chip, dividend growth stock in the pipeline sector.
  2. Stock trades at a discount relative to its peers.
  3. I can borrow cheap money.
  4. I have a long term investment horizon.
  5. I have an exit strategy.

Since all my criteria are met, I will use my Stable Leverage strategy for this investment. My TRP stock earns me over $100 of passive income every year, net of interest fees. Furthermore, TRP’s stock price has increased 48% since I bought it, easily beating the stock market index. If I hadn’t used this strategy back then I would have missed out on literally thousands of dollars of gains. And now I see the same opportunity in ENB to do it again. 🙂

Going into debt to buy stocks isn’t the most popular retirement plan. But many of the best financial decisions are made by going against popular opinion – as long as proper research and due diligence is conducted prior. I plan to buy 100 shares of Enbridge (TSE:ENB) later this month. There’s a small risk I can lose money with this strategy, but it’s a risk I’m willing to take.

 

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Random Useless Fact

Money can’t solve everything.

 

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16 Comments on "Is Enbridge Stock a Good Buy at $47?"

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Tom @ Dividends Diversify
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Hi Liquid,
I hold Enbridge and am glad you see it as a good value today. I plan to continue holding. I have owned the stock dating back to 2011 when it was Spectra Energy (SE). It has been a great investment and based on your analysis, I expect it to continue to be so. My only disappointment (from a US investors perspective) is I have to pay a 15% tax on all my dividends since the company is now domiciled in Canada. That is the primary reason I invest in very few Canadian companies. There are many good ones that I pass on because of the 15% tax. Enbridge is to good to pass on, in my opinion, and I guess I don’t mind paying the taxes if I making good money on the stock. Tom

beth
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beth

I bought ENF, Enbridge Income Fund, on it’s dip this past two weeks. Why did you pick Enbridge over the income fund and the sweet $0.17 per month dividend?

SpriteMcBain
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SpriteMcBain

I’m interested in knowing the answer to this as well.

jukka
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jukka

Enbridge generates a MASSIVE negative free cash flow.

During the last 4 years operating cash flow has been $16 billion while capex has been $44 billion. That is a $29 billion negative free cash flow.

$23 billion of this black hole was financed with more debt and issuance of new shares.

If debt markets would close down and if no investors would be willing purchase new shares of Enbridge, the company would go down under instantly or require massive restructuring.

Jesus. I would stay away from this kind debt card house.

jukka
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jukka

And here is a prime example of a business I would more than willing to pour all my money into:

http://www.atlascopcogroup.com/content/dam/atlas-copco/corporate/documents/investors/financial-publications/english/20171018-en-Q3-2017.pdf

(check slide 14)

SpriteMcBain
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SpriteMcBain

I’m very torn on this one.

Enbridge relies heavily on external financing. It worked for years because they are good and they weren’t that big. For them to grow at 10% over the next 7 years it will result in them doubling. I think that will require something like an additional $75B in debt (still need to run the math). It doesn’t make sense. And for you to as an investor to debt finance a position that is going to have $150B in debt is a recipe for disaster.

It’s a bit like that old company Long Term Capital Management(https://en.wikipedia.org/wiki/Long-Term_Capital_Management)
Extrapolate a long series of low volatility and use leverage to generate a high return. Something goes wrong and you get wiped out because you don’t appreciate the spectrum of possible events that could happen.

ENB has 100 year debt that is yielding 4.4% right now. It was issued in 2012, but it goes to show you how people just extrapolate the past. Would you give anyone 100 year money for 4%.

Still on the fence……

Phil
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Phil

Enbridge is down 16% this year so far… I hope it should be considered a value at this level given it’s drop 😉 I own a few hundred shares of ENB… It is a handful of what I call my energy stocks… Thank goodness I have held a good amount of info technology stocks this year, or I’d be probably in the hole on investments. But hey, that’s our challenge, isn’t it – Cheers

FI3000
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I’m also on the fence when it comes to ENB. Over the longer term I think you’ll do fine. However, I think in the short term it could drop another 10% from here. I think there’s a few reasons why:

1. There’s currently a negative sentiment towards pipelines (in canada anyways).
2. They carry a lot of debt and have a high dividend; as a result they would be doubly impacted if interest rates rise.
3. Not much organic growth
4.I think if they miss on earning growth they could get hammered. For example, if we use 5% growth instead of 10% in the fair market formula the price drops from $62 to $39.

That being said I do plan on owning ENB in the future but would feel more comfortable owning it at around $40.

Personal Alpha Investments
Guest

Great Article. I recently initiated a position in Enbridge. It was on my list and I just came across your article. In my mind its a win-win witha 5%+ yield, and the fact that its been there for a longer time. The latter obviously is due to high capital requirements as its in that industry space. Regardless, the current price does not reflect the future potential for those who can hold it out for long.

I believe it may end up going back to its 2015 levels, and in that case I would simply add to it!

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