Enbridge (ENB 3.34%) announced this week that it would increase its dividend 10% for 2018. This move will push the Canadian energy infrastructure giant's yield well past 5%. Furthermore, that increase continues the company's annual tradition of boosting its payout, which it has now done for a remarkable 23 straight years. These haven't been small nudges just to keep the streak alive, either, considering that it has increased its payout by an 11.2% compound annual growth rate over the past two decades.
Meanwhile, Enbridge has full confidence that it can keep its streak going for the next several years, since it also stated that it plans to boost the payout by a 10% annual rate through 2020. While that's at the low end of the company's initial dividend growth forecast when it bought Spectra Energy last year, it's still a top-tier plan and matches Canadian rival TransCanada's (TRP 3.03%) 10% annual dividend growth through 2020.
This high-growth, high-yield stock will grow safer in 2018
When Enbridge initially sealed the deal to acquire Spectra Energy, it anticipated that the combined company could increase the payout 15% in 2016 and at a 10% to 12% rate all the way through 2024. While Enbridge delivered the promised 15% increase last year, it now plans to increase the dividend at the low end of that range over the next three years. Driving that decision is the company's desire to shore up its balance sheet after leverage was a concerning 6.2 times debt-to-EBITDA this year, due in part to the volume of expansion projects the company had under construction, including 12 billion Canadian dollars ($9.4 billion) entering service in 2017. While the company expected that number to come down to a more comfortable 5.0 times by 2019 as its expansion projects started generating earnings, it has now decided to accelerate that timetable.
Enbridge now expects to hit that leverage target by the end of 2018, which it will accomplish by selling a minimum of CA$3 billion ($2.4 billion) of non-core assets, including some of its unregulated gas midstream and onshore renewable assets. Those sales and some other strategic financing transactions will ensure that the company maintains a solid investment-grade credit rating, so it has open access to the capital needed to finance its massive backlog of expansion projects. That will help firm up the long-term sustainability of the company's lucrative payout.
A leaner, meaner dividend growth machine
Enbridge expects to sell additional assets over the next few years and has identified CA$10 billion ($7.8 billion) in assets that are non-core to its three crown jewel businesses: liquids pipelines and terminals, natural gas transmission, and storage and natural gas utilities. By monetizing those assets and growing its dividend at the low end of its guidance range, Enbridge won't need to sell any more stock to finance the remaining CA$22 billion ($17.2 billion) of growth projects it currently has in development through 2020. That matches with TransCanada's forecast of no significant future stock sales to finance growth. Furthermore, it will push Enbridge's leverage ratio to an even more comfortable 4.5 times by 2020.
Meanwhile, Enbridge has ample growth potential beyond 2020. When it agreed to acquire Spectra Energy, it had already identified CA$48 billion ($37.6 billion) of development projects between the two companies. That's more than double the size of TransCanada's currently identified development backlog, which has taken a significant hit this year after it canceled two major large-scale pipeline projects. Enbridge has already secured nearly CA$4 billion ($3.1 billion) of its long-term opportunities this year and should continue locking down projects in the future, given the anticipated need for oil and gas pipeline infrastructure in the U.S. and Canada. According to one estimate, North America needs to build roughly $333 billion of new natural gas-related infrastructure through 2035, along with up to $190 billion in additional oil pipelines and storage tanks over that same time frame. While Enbridge has plenty of competition for these projects, it also will have a stronger financial profile, which puts it in a better position to pursue future growth opportunities.
An enticing combination
While Enbridge's decision to grow its dividend at the low end of its forecast range over the next three years might seem like a disappointment, it's a net positive for investors over the long term. That's because it will enable the company to firm up its balance sheet faster, which enhances the long-term sustainability of its dividend. Furthermore, it will eliminate the need to sell stock in the next few years, which could have weighed down shares. Enbridge's improving financial picture makes it an enticing income stock for the long term since the company offers investors an attractive combination of growth and income for even less risk.