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Is Enbridge the Right Stock to Retire With?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Even as oil prices get most of the spotlight with their big volatility, natural gas has largely been stuck in the doldrums for years, with prices that stubbornly refuse to rise. But despite weak demand, the big increase in supply requires ways to transport the clean-burning fuel to customers. That's where Enbridge (NYSE: ENB  ) comes in, and when natural gas finally comes back into favor, Enbridge could be poised to soar. Below, we'll look at how Enbridge does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Enbridge.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$26.1 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

2 years

Fail

Stock stability

Beta < 0.9

0.31

Pass

 

Worst loss in past five years no greater than 20%

(17.9%)

Pass

Valuation

Normalized P/E < 18

29.64

Fail

Dividends

Current yield > 2%

2.9%

Pass

 

5-year dividend growth > 10%

10.5%

Pass

 

Streak of dividend increases >= 10 years

16 years

Pass

 

Payout ratio < 75%

42.4%

Pass

       
 

Total score

 

8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With a score of eight, Enbridge delivers nearly everything that conservative investors like to see in a stock. Between a good dividend yield that has grown strongly for more than a decade and low volatility, the growth potential for the natural gas industry is an added bonus.

Enbridge is a Canadian company that transports oil and gas throughout North America. The company has two main businesses: Operating a pipeline network to move crude, natural gas liquids, and refined products; and running a gas distribution network to residential and business customers.

Pipeline companies have come into the spotlight since Kinder Morgan's acquisition bid for El Paso (NYSE: EP  ) . With its existing Kinder Morgan Energy Partners (NYSE: KMP  ) limited partnership, Kinder Morgan's addition of El Paso assets would create the fourth-largest energy company in the U.S., with about a quarter of the nation's total pipeline mileage in its network.

One problem that Enbridge faces, though, is debt. At about 175% of equity, Enbridge's debt tops both Oneok Partners (NYSE: OKS  ) and Energy Transfer Partners (NYSE: ETP  ) . Even though the company manages to pay an impressive dividend and has maintained a 16-year streak of growing its payout annually, debt could eventually pose a threat to that streak.

For retirees and other conservative investors, the real question for Enbridge is when the natural gas market finally wakes up from its long slumber. With producers like SandRidge Energy (NYSE: SD  ) and Chesapeake Energy (NYSE: CHK  ) chomping at the bit for a better environment for natural gas, Enbridge stands ready to profit once it comes.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Add Enbridge to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of ONEOK Partners and Chesapeake Energy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

10/23/2014 4:01 PM
ENB $46.55 Up +1.14 +2.51%
Enbridge, Inc. (US… CAPS Rating: *****
CHK $21.79 Up +0.22 +1.02%
Chesapeake Energy CAPS Rating: ****
EP.DL $0.00 Down +0.00 +0.00%
El Paso Corp CAPS Rating: ****
ETP $64.25 Up +0.59 +0.93%
Energy Transfer Pa… CAPS Rating: ****
KMP $94.98 Up +1.90 +2.04%
Kinder Morgan Ener… CAPS Rating: *****
OKS $52.75 Up +0.87 +1.68%
Oneok Partners CAPS Rating: *****
SD $4.08 Down +0.00 +0.00%
SandRidge Energy CAPS Rating: ****

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