Nov 092017
 

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

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! ūüėÄ This is why I believe Enbridge is potentially oversold right now and is a good buy. ūüėÄ 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.

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Dec 112012
 

One myth about investing in the stock market or any other market where prices fluctuate is that it’s risky. But people who know how to value a stock understand that it doesn’t have to be risky if they buy the right stocks at the right time. Volatility and risk aren’t always correlated. Some companies with steady growth such as Enbridge have been pretty stable over the years.

Enbridge stock chart, volatility and risk

That’s not to say ENB is a good buy today because whether a stock is reasonably valued or not is another topic. But here’s a look now at Caterpillar below, who manufactures construction equipment, heavy machinery, etc.. Notice how the stock is more volatile over the same period as Enbridge.

Caterpillar stock chart, Volatility and Risk

But that doesn’t necessarily mean CAT is a riskier stock than ENB. ¬†CAT is a more cyclical company so its Beta is suppose to be higher. What makes a company safe to invest in for myself is a positive trend of earnings growth, dividend growth, and industry expansion. Both companies have had stable dividend growth over the last decade meaning managers are confident about their company’s future performance.¬†Both companies have also increased their profits over the years. Pipeline companies are looking to expand their pipes across Canada, and In Alberta alone the government has forecast there will be¬†114,000 jobs¬†in the construction industry over the next decade (o.O) ENB and CAT are both in growing industries with growing demand for their products/services. ¬†Stocks can vary in risk depending on what kind of business they are, but volatility doesn’t necessarily mean risk. It just means at some point in time, there might be ¬†a good opportunity to buy the stock at a great value ūüėČ

Here’s what the Oracle had to say on the subject….

“Volatility does not measure risk. Past volatility is not a measure of risk. It‚Äôs nice math, but it‚Äôs wrong. If a farm in Nebraska used to sell for $2,000 per acre, and now it sells for $600 per acre, investment theory would say that the beta of farms has gone up, and than they are more risky than before. If you tell that to people, they‚Äôll say that that‚Äôs crazy. But farms don‚Äôt trade daily the way stocks do. Since stock prices jiggle around, finance professors have translated that into these investment theories.¬†It can be risky to be in some businesses. Risk is not knowing what you‚Äôre doing. If you know who you‚Äôre dealing with, and know the price you should pay, then you‚Äôre not dealing with a lot of risk.¬†We have invested in a lot of sectors that have high betas. The development of beta has been useful to people who want careers in teaching.”
– Warren Buffett

Beta РThe measure of volatility. Higher beta = bigger fluctuations in price. The overall market has a Beta of 1. If a stock is said to have a Beta of 1.5 then that means it will be 50% more volatile than the market.

Apr 242012
 

I recently updated my Dividend Subsidizing Hedge Fund¬†thanks to a reminder from a reader. I’m receiving more subsidies now in all categories. The biggest WIN is that my monthly electricity bill is now 100% subsidized by the utility industry and its partners. This means I don’t have to pay another dime of my hard earned money to pay for my electricity¬†usage ever again¬†(or at least for the foreseeable future.)

I have been slowly buying shares of energy distributors over the last few years, and now I finally have enough of their stocks to receive the dividends needed to fully fund all my electricity needs. It took 3 years and over $8,000 of my personal savings but it’s totally worth it (^o^)¬†My most expensive electricity bill ever was $28, but for most months it’s¬†under $25.¬†To be safe I’m going to assume I spend $30¬†every month on electricity.¬†However I also get $30 of dividends a month from companies in the business of providing electricity to people’s homes. This $30 dividend is kind of like a rebate, because I’m basically getting a 100% refund from the same group of people whom I just paid. If I became unemployed tomorrow, I don’t have to worry about not having power at home since my electricity bill will technically be paid for, by its own industry.

Here are the companies paying my hydro-electric bill right now.

Just Energy (JE.TO)
They sell electricity to residential and commercial clients. They currently have a dividend yield of a jaw dropping 9.75% and is traded on both the Canadian and US stock markets. Some of their products are sourced from renewable energy like wind, hydro, or biomass. I have $1920 worth of stocks in this company.

Enbridge (ENB.TO)
A pipeline company that mainly distributes gas but is also in the business of alternative energy and power transmission. Its dividend yield at 2.89% may not be as high as other utility companies but most of its growth comes from its appreciating stock price, which is up over 50% since I bought it in 2009. I currently have $1520 worth of Enbridge shares.

SNC Lavalin (SNC.TO)
A world class engineering company that makes dams, bridges,¬†reservoir, power stations, etc. SNC doesn’t provide electricity to people, but they work closely with BC Hydro, and other utility companies. They are an essential part of the energy infrastructure in this country and around the world. And part of the reason our electricity bills keep going up is because companies that¬†make electric generators like SNC are charging more to build and maintain them. There dividend is 2.41%, and I own $5265 worth of shares in this company.

My stock holdings in those 3 companies above provide me with $360 of dividend income per year. As long as everyone else in society is paying their electricity bills on time these companies will continue to make money, and continue to distribute dividends, which means I’ll continue to receive enough funds to cover my own hydroelectric usage. ¬†Unfortunately there is no direct way to invest in the equity of BC Hydro (my actual electricity provider) otherwise I would. This is the bane of government operated services. There’s no competition and no way for investors to benefit if the company performs well. On the other hand, a crown corporation does keep electricity prices predictable, and makes society more stable, so I can’t complain too much.

Nov 172011
 
¬† ¬† ¬†A government decision has created an indirect benefit to investors. Canada has started to roll out the new plastic banknotes starting with the $100 bill.¬†¬†I think these are much better than our old paper money because they’re more durable, ¬†harder to¬†counterfeit, waterproof, recyclable, and they look amazing. I guess this gives a new meaning to the term “paying with plastic.”¬†( Ôĺü‚ąÄÔĺü)

The Australians invented these polymer banknotes and many countries around the world ¬†have been using this technology for years. Now it’s our turn.¬†These notes will be printed on a polymer substrate manufactured by Securency International in Australia. Yes, unfortunately we have to import our own currency material. The actual printing of the banknotes, however, will still be in Canada of course.

 

But I think there’s an opportunity here for investors looking to cash in¬†on this transition.¬†The base material for these notes, biaxial-oriented polypropylene, is just a fancy term for durable plastic, and we all know plastic comes from hydro carbons made from oil and gas. So going long in energy companies will most certainly prove fruitful as more of these notes are printed in Canada, and are being adopted by other nations around the world. Large integrated names like Suncor Energy, and Exxon Mobil, produce both oil and natural gas. Pipelines like TransCanada Corp, and Enbridge Inc, are also great ways to ride the energy wave.

10 year Investment Returns
Average Stock Market (S&P; 500) = 13%
Suncor:                                          =206%
Exxon:                                           = 99%
TransCanada:                                =102%
Enbridge:                                       =220%

This isn’t a coincidence. Smart investors have been invested in energy/pipeline companies for decades. Natural resources are a necessity in modern society and the demand will only go up in the decades to come. Invest early¬†and get time on your side.

Disclaimer: I own shares of Suncor and Enbridge, and plan to buy TransCanada soon.