In This Article:
With a roughly $55 billion market cap, Canada-based Enbridge Inc. (NYSE: ENB) is among the largest energy companies in North America. It offers investors a robust 5.5% yield and has increased its dividend annually for 22 consecutive years. The dividend has grown at 12% a year on an annualized basis over the past decade -- roughly four times the historical rate of inflation growth! But read this before you jump at what sounds like a great investment.
Reducing complexity
Enbridge is generally considered a well-run company, the proof of which is in its impressive dividend history. Simply put, poorly run companies usually don't have 22 years of annual dividend hikes behind them. That said, in late 2016, Enbridge agreed to buy Spectra Energy for around $28 billion, setting off a string of big corporate changes.
Image source: Getty Images.
Overall, the deal is expected to be a long-term positive. However, the acquisition brought with it oversight of Spectra Energy's controlled limited partnership, Spectra Energy Partners, LP. That addition increased the number of external entities controlled by Enbridge to four, leaving it with a very complicated corporate structure. Recent regulatory changes and tax law shifts, meanwhile, reduced the benefit of using all of these different controlled companies as funding vehicles.
So Enbridge decided that 2018 was the year to reduce complexity. It started working to roll up all of its controlled entities for what it hoped would be roughly $8.8 billion. That price tag has gone up to $10.4 billion now that negotiations have been completed and final agreements reached. This move will be a net benefit over the long term because Enbridge will get to keep more of the cash flow that it generates from the assets in these businesses -- and, perhaps just as important, its business will be much easier for investors to understand.
A lot of moving parts
That said, investors will need to keep a close eye on the news flowing out of Enbridge Inc. to make sure all of these deals get completed as planned. But this isn't all that's going on. Enbridge is also spending heavily on growth projects to expand its business.
In 2018, its goal is roughly 7 billion Canadian dollars in capital spending. In 2019 and 2020, it has plans for another CA$22 billion in spending. So not only is Enbridge in the middle of buying four companies, it is also in the middle of a capital spending spree. Management expects the projects it has lined up to push dividends higher by 10% a year over the next three years, an ambitious goal even if that growth is slightly below its historical average. The question is whether management is trying to do too much at once.