At about C$56, Enbridge Inc. (TSX:ENB)(NYSE:ENB) offers a yield of nearly 4.2%. Since it closed the merger with Spectra Energy on Monday, management intends to raise its dividend some more after the close. (Enbridge already hiked its dividend by 10% in Q1.)
Combined with the Q1 increase, the total 2017 dividend increase is anticipated to be 15%. This implies an annual payout of C$2.438 per share, or a forward yield of almost 4.4%. That’s an attractive yield compared to Enbridge’s historical yield range.
It’s helpful to reflect on history and learn from it. So that next time when a similar situation occurs, investors can be better equipped to make a more suitable decision for their own portfolios.
Here’s what I learned from the 2014 oil downturn.
It has been a difficult time for investors who invested in energy stocks right before the WTI oil price fell from over US$100 to as low as US$30 and stabilizing in the US$50 range.
Large Integrated Energy Companies
Exxon Mobil Corporation (NYSE:XOM) fell about 27% from US$100 in 2014 to the 2015 low of US$73. Buying in the low would have pocketed you a 23% gain by now while receiving a 4% dividend yield.
The company also stayed on schedule to raise its dividend. Even though it was only a raise of 2.7%, it still showed Exxon’s commitment to its dividend increases. It also was a proof that it had a stronger balance sheet, as other energy companies froze or even cut their dividends.
In early April, Morningstar lowered Exxon Mobil’s economic moat rating from Wide to Narrow due to low commodity prices, which are having an impact on the highest-quality integrated firm. Imagine the impact they’re having on other commodity price sensitive energy companies.
Altagas Ltd. (TSX:ALA) is not just a pipeline company. It also has strong utility and power businesses. With its FFO per unit expected to grow this year, its 6% yield should be safe with a payout ratio of below 60%. Priced at under $33, Altagas is priced at a margin of safety of 11-18%. Project opportunities exist through 2020 across all 3 of its businesses. In addition to the cash flow generated from existing assets, new projects going online will also drive growth.
Altagas Ltd.: The business
40% of Altagas’s EBITDA comes from its contracted power operations, 35% comes from its utilities, and 25% comes from its contracted midstream operations. In 2015, 91% of its EBITDA was investment grade, of which 51% was in the A category and 40% was in the BBB category.
Altagas transacts about 2 Bcf/d of natural gas, including processing and moving it to the key markets of North America and Asia. Secondly, the company has the capacity to generate 2,041 MW of power. Lastly, Altagas operates 5 utilities that serve natural gas to more than 560,000 customers (22% in Canada and 78% in the U.S.).
Investors are probably worried about its midstream operations because of low natural gas prices. However, only 4% of its midstream EBITDA (equating to <1% of total EBITDA) is exposed to commodities. That is a low exposure compared to the industry average of 17%. Further, 72% of its gas portfolio is with investment grade counterparties. Read More