Tuesday, January 11, 2011

Enbridge Income Fund

This is a stock (TSX-ENF) that I follow, but do not own. When I bought into Enbridge, I liked Enbridge Inc (TSX-ENB) better than this fund. You would not buy both because Enbridge Inc owns about 40% of the shares of this company. Enbridge Income Fund has just changed to a corporation and has changed its symbol from ENF.UN to ENF. The name has also changed from Enbridge Income Fund Holdings to Enbridge Income Fund.

This stock has given its investors some very good dividend income. The part of the total return from dividends is around 6.5% to 7.5% on a long term basis. The total return is around 10 to 11%, so stock increase is a nice 4%. This is good for utilities. The thing that would concern me is payout ratios. The payout ratio for distributable income was good at around 40%; however, this stock is now a corporation.

As a corporation, one looks at payout ratios for earnings and cash flow. I find that the payout ratio on earnings to be especially high. The payout ratio for cash flow is a more moderate 41% over the past 5 years, but is expected to go higher over the next two years. A connected thing I do not like is the reduction in book value for the 9 months ending in September 2010. The deficient has grown and pushed the book value down 15%. The company has announced that they will continue the current distributions as dividends, but payable quarterly rather than monthly.

When I look at growth, the growth in revenue, cash flow and earnings has been ok. We do not have many years to work with as this fund was only established in 2003. For example, the revenues have grown around 5.6% per year and the earnings have grown about 4.8% per year over the past 5 years. And, since we are coming out of a recession, this growth is not bad. Also, according the analysts’ expected earnings for 2010, the earnings growth for the last 5 years should be changing to around 8.5% at the end of 2010. This is a good figure. But earnings have not come in yet for 2010, so this is not assured.

When I look at the Liquidity ratio, it is low at 0.75 currently. The 5 year average is just 0.59. The main reason is that the current portion of the long term debt is included. There has been no indication that the company will have any problems with this debt. The other thing is the Asset/Liability Ratio is also low at 1.12. Assets do cover liabilities, but not by a good margin. The final thing to remark on in this vain is the Leverage Ratio also high at 6.85. Utilities tend to have lots of debt and this company is no exception.

In connection with the Return on Equity, this company seems to have a rather low one. For the year, ending in 2009 it was just 5.4% and the one for the last 12 months ending in September 2010, it is a bit better, but it is only 5.9%. The ROE has been a bit better in the past, but it has never been great.

It is interesting that analysts covering this stock seem to think that 2010 will be a better year than 2011 and are giving lower estimates in earnings and cash flow for 2011 than they are for 2010.

The Enbridge Income Fund assets are a 50% interest in the Alliance Canada Pipeline and a 100% interest in Enbridge Pipelines (Saskatchewan) Inc. They also have Green Power assets, which include a 50% interest in NRGreen Power Limited Partnership. NRGreen operates electrical generation facilities using waste heat, and holds interest in three wind power projects in Western Canada. Owners: Just over 40% of the shares are owned by Enbridge Inc. Its web site is here Enbridge Income Fund . See my spreadsheet at enf.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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