Monday, November 25, 2019

Is Enbridge's Dividend Sustainable?

Is Enbridge’s dividend sustainable? When @johnyboy1853 asked me that on Twitter at the end of September, I thought it was an excellent question. Afterall, the company’s dividend payout ratio of EPS was 108% in 2017, 133% in 2018, and 101% over the last four quarters ending September 30, 2019. Given Enbridge produces more dividend income for me than any other investment holding, a deeper dive was merited.

As scary as the payout ratios listed above look, I wanted to focus more on cashflows. Looking at the 2018 cashflow statement, the CFO of $10.5B and asset sales of $4.4B easily cover the $6.8B of CAPEX and $3.8B of dividends (common and preferred). However, over the last four quarters, the CFO of $9.9B and $2.5B of asset sales barely outpaced the $6.2B of CAPEX and $6.1B of dividends.

Although the past earnings and cashflows are important starting points to understand Enbridge’s dividend sustainability, investors should focus on the future to determine if Enbridge can keep affording to boost dividends by 10% in 2020. Looking at consensus estimates, analysts expect Enbridge to generate CFO of $10.8B in 2020, spend $5.5B on CAPEX, and pay out dividends of $6.7B. The $1.4B gap between outgoing cash and CFO would have to be made up via asset sales or debt issued. Enbridge had a target to sell $8B of non-core assets in 2019, so $1.4B of non-core assets would likely be very achievable for 2020.

Beyond the numbers, the sustainability of Enbridge’s dividend will ultimately be determined by the long-term success of their business model. With a large and diversified asset base, and pipelines throwing off predictable cashflows, there are reasons for optimism. Some key risks include the heavily regulated environment in which the company operates, reputation risks when spills occur, as well as Enbridge’s still highly leveraged capital structure (debt to EBITDA well over 5X at September 30, 2019).

Obviously my crystal ball is murky when it comes to Enbridge’s dividend sustainability. I did find it interesting that last December during their investor day, Enbridge’s management talked about growing their distributable cashflow by 5-7% after 2020. That seems like reasonable growth range given that TC Energy, a similar company, recently gave their long-term dividend growth range of 5-7% after 2021 during their investor day presentation. 

Do any of you feel like Enbridge won't be able to sustain their dividend for the next five years?

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