Enbridge Inc. in Edmonton on Aug. 9, 2021.Artur Widak/Reuters
Enbridge Inc. ENB-T illustrates one of the problems with chasing after stocks with high dividend yields: The regular cash distributions might entice investors, yet fail to make up for plodding share prices.
The result? Long-term returns, in the case of Enbridge (full disclosure: I own shares), that lag the diversified S&P/TSX Composite Index by a substantial margin.
This week, the share price sank to a two-and-a-half year low, driving the dividend yield to a high of 7.9 per cent, after the Calgary-based pipeline operator announced a deal to acquire three U.S. natural-gas utilities from Dominion Energy Inc. for US$9.4-billion in cash and US$4.6-billion of assumed debt.
To help finance the deal, Enbridge issued $4.6-billion of new shares priced at $44.70 each – marking a 7.2-per-cent discount to the previous day’s closing price. The sale price of the new shares virtually assured a dismal reception by investors and added to the stock’s disappointing performance in recent years.
Consider that over the past five years, Enbridge’s share price has risen just 1.6 per cent, as of Thursday. That compares – poorly – with a 25.4-per-cent gain for the S&P/TSX Composite over the same period.
Factor in dividends and Enbridge’s performance improves. But the stock’s total return of 41.9 per cent still lags the index by nearly five percentage points over five years.
The 10-year track record looks even worse. With dividends, Enbridge has lagged the index by more than 33 percentage points.
Sure, interest-rate increases over the past 18 months have weighed on many dividend stocks, which look less appealing when some guaranteed investment certificates are yielding more than 5 per cent.
But this argument goes only so far. Over five years to the end of 2021, when Canadian interest rates fell as low as 0.25 per cent (compared with 5 per cent today), Enbridge’s total return lagged the TSX Composite by 17 percentage points.
This dismal performance raises the question of whether Enbridge’s dividend yield is more of a warning sign than an opportunity to score an impressive source of income.
For sure, there is a bullish case here, which I am clinging to.
By increasing its exposure to natural gas with its latest deal, Enbridge is diversifying its operations beyond pipelines and betting on fossil fuel as an essential commodity as North America transitions from dirtier sources of energy, such as coal and oil, to cleaner renewables.
“We remain firmly of the view that all forms of energy will be required for a safe and reliable energy transition,” Greg Ebel, Enbridge’s chief executive, said on a conference call.
This bet arrives at a time when many investments tied to offshore wind power are floundering, as inflation and steeper financing costs cut into the viability of some projects. Oersted A/S, the Danish wind farm developer, reported impairment charges in August related to three U.S. projects.
Its share price has fallen 40 per cent since the end of June – making bets on fossil fuels look almost safe by comparison.
Still, Enbridge’s high dividend yield may be a source of concern for some investors.
The company is standing by its commitment to raise the payout, which is something it has done each year for the past 28 years.
In its announcement this week, it said that the acquired gas utilities will “enhance Enbridge’s overall cash flow quality and further underpin the longevity of Enbridge’s growing dividend profile.”
However, this week’s equity offering, which added more than 100 million shares, means that the company’s total annual dividend payout increases by about $365-million.
This additional financial commitment is in addition to concerns from credit-rating agencies about Enbridge’s high debt levels. Gavin MacFarlane, senior credit officer at Moody’s, said in a note this week that the deal with Dominion Energy adds “pressure to an already weak financial profile.”
As well, the stock’s high dividend yield may be reflecting concerns from investors about what sort of returns they can expect.
While Enbridge raised its quarterly payout in December, the increase was relatively paltry at just 3.2 per cent. That’s a slow-growing dividend at a time when the stock price has been drifting.
Indeed, investors may be facing the prospect of receiving a fat dividend from Enbridge, but little else.
Is it worth complaining about a dividend yield of nearly 8 per cent? Maybe not. But over the past five years, Enbridge has failed to keep up with the broader market even when the payout is included.
Big dividends are nice – but only when they come with a rising share price.