Enbridge Stock: Higher Dividend Growth Is Coming In Future Years (NYSE:ENB) (2024)

Introduction

After years of reliance upon debt-funding to simultaneously support their growth and dividends, it seemed back in 2021 that Enbridge (NYSE:ENB) was about to change to a self-funded model heading into 2022, thereby representing a game-changer for the desirability of their high 6.11% yield, as my previous article explained. Even though their subsequently released guidance for 2022 has not quite been as good as hoped in this respect whilst also only seeing a lackluster 3% dividend growth, at least it appears that higher dividend growth is coming in future years, as discussed within this follow-up analysis that also covers their subsequently released second half of 2021 results.

Executive Summary & Ratings

Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.

*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and also best captures the true impact upon their financial position.

Detailed Analysis

On the surface, their cash flow performance throughout the second half of 2021 appears somewhat lackluster with their operating cash flow only ending the year at C$9.256b and thus down 5.37% year-on-year versus their previous result of C$9.781b during 2020, despite the relatively more stable operating conditions. Thankfully this was merely due to an abnormally large temporary working capital build of C$1.616b during 2021 that if removed, boosts their underlying operating cash flow to C$10.872b that sits a solid 12.22% higher year-on-year than their equivalent result of C$9.688b during 2020. When looking ahead into 2022, thankfully their guidance points for their strong growth to continue, as the graphs included below display.

It can be seen that their guidance for 2022 sees their EBITDA increasing by circa 9% year-on-year whilst their distributable cash flow increases by circa 8% year-on-year, which indicates that their operating cash flow should see a comparably sized increase given its positive correlation. Meanwhile, their 2022 funding plan sees their growth capital expenditure at approximately C$4.5b with their maintenance capital expenditure lifting the total to approximately C$5.5b against approximately C$5b of internal cash flow, which is effectively their operating cash flow less their dividend payments.

It remains to be seen exactly where their cash inflows and outflows will land during 2022 but at least this guidance indicates that they should either be broadly matched or at worst, they may require a relatively small additional C$500m of debt-funding. Whilst not quite the game-changer that their previous guidance earlier in 2021 had indicated whereby they cease all reliance upon debt-funding, as discussed within my previously linked article, it nevertheless appears that 2023 should see further improvements that make way for higher dividend growth with their project backlog being reduced, as the graph and table included below display.

It can be seen that upon starting 2021 their project backlog was C$17b, however, fast-forward to the start of 2022 and it is already down to C$10b. Unless they add a large number of new projects, their circa C$4.5b forecast growth capital expenditure during 2022 will see this almost halved, or at least down by another approximate one-third. Since projects normally have a one-year-plus lead time before commencing, this indicates that their capital expenditure should continue decreasing into 2023 and likely beyond, thereby providing room to fund higher dividend growth as their free cash flow surges higher. Whilst it remains possible that they reverse course and end up adding a large number of new projects to their backlog later in 2022, the facts at hand at the moment indicate that lower capital expenditure is on the horizon.

Following 2021 their net debt ending the year at C$75.354b, which is a staggering C$8.909b or 13.41% higher year-on-year versus its level of C$66.445b at the end of 2020 and is even a sizeable 11.04% higher versus its level of C$67.865b when conducting the previous analysis that followed the first half of 2021. This stems from the second half of 2021 not only seeing more than half of their full-year capital expenditure but also C$991m of their working capital build as well as C$2.644b of acquisitions net of divestitures. Thankfully their broadly equal cash inflow and outflows during 2022 should see their net debt remain broadly unchanged or at worst, only increase slightly, barring any further acquisitions or share buybacks.

It was not surprising to see their leverage follow their net debt higher during 2021 with their net debt-to-EBITDA now at 5.64, which stands in contrast to their result of 4.90 when conducting the previous analysis and thus is now once again above the threshold of 5.01 for the very high territory, as was the case with their result of 5.19 at the end of 2020. Meanwhile, their net debt-to-operating cash flow of 8.14 represents a large increase versus its result of 6.27 when conducting the previous analysis and 6.79 at the end of 2020, although if not for their working capital build, it would have only increased to 6.93.

It would normally be concerning to see very high leverage but thankfully, their ability to consistently grow their earnings helps mitigate these risks, although this still requires close monitoring because if their leverage were to consistently increase in the coming years, it would foretell trouble. Thankfully if their future capital expenditure comes down as expected, it should boost their free cash flow and help keep their leverage under control and in particular, their forecast circa 9% earnings increase during 2022 should see their leverage decrease accordingly given their little to no additional net debt.

On the surface, their liquidity appeared to have deteriorated since conducting the previous analysis with their current ratio dropping to only 0.49 versus its previous result of 0.60 following the end of the first half of 2021. Thankfully this merely stems from their current debt maturities swelling to C$7.679b that if removed, sees their current ratio sitting at an adequate 0.85. Whilst excluding short-term debt maturities is not normally advisable, unlike their smaller peers, their very large operational size provides superior access to capital markets to help source liquidity to refinance any future debt maturities, thereby lowering their meaningfulness even as central banks begin tightening monetary policy.

Conclusion

Despite 2022 only seeing relatively low dividend growth and a continued relatively small reliance on debt-funding, at least it appears that 2023 should see their free cash flow surge as their project backlog is reduced, thereby providing scope for higher dividend growth. Since their share price has rallied almost 20% since issuing my previous rating late in 2021 when assessing their valuation, as per my other article, I now believe that downgrading to a buy rating is appropriate versus my previous strong buy rating.

Notes: Unless specified otherwise, all figures in this article were taken from Enbridge's SEC filings, all calculated figures were performed by the author.

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