Friday, March 2, 2012

Enbridge Inc 2

I know utilities are overpriced and I have a lot of utilities stock. I know there is a theory that you should sell when a stock is overpriced and then rebuy it when it is cheaper. The problem is I have found is that it is much easier to see you have an overpriced stock than to see and know when it is later better or underpriced. The thing is I have had overpriced stocks just muck around until they were at a relatively good price.

If you sell now at an overprice amount say $30, but buy back a later date at a relatively reasonable price of $30 are you further ahead? This can happen. Stock may or may not fall much to go from overpriced to reasonable price. The change in price is because ratios are better but this can occur over time as earnings, cash flow and book values increase, and not because of lower stock price.

To sell a stock when it is overpriced and buy it back later when it is not sounds great in theory, but I have not found that it works particularly well for me in practice. Not only getting a lower good price is a problem, but you pay fees at the sell and buy. Also, if the stock is in your trading account, you have to consider taxes.

Now back to Enbridge (TSX-ENB, NYSE-ENB), which is the stock I am discussing today. I have also done very well on this pipeline. I bought stock in 2005, 2008 and 2009. My total return is 20% per year. The portion attributable to dividends would be 3.48% per year or 17% of my total return.

When I look at insider trading I find $35M of insider selling and no insider buying. Insider selling is by CEO, CFO and officers. Everyone gets options, and all but directors have more options than shares. There is an awful lot options outstanding. The insider selling seems to be of options. Over the past 10 years, shares have grown by 1.9% per year. Over the past 3 years, growth has been due to DRIP and stock options. Stock options accounted for 34% of the increase in shares over this period or growth of .6% per year.

Accounting to Reuters there are 412 institutions holding 73% of the shares of this company. Over the past 3 months, they have bought and sold stock and their holdings are now lower by just under 1%.

I get 5 year median low and high Price/Earnings Ratios of 17.7 to 21.0. The current P/E of 23.2 would make the stock price relatively high. I get a Graham Price of $19.24. The current stock price of $38.26 is some 99% higher. The 10 year median high difference between the Graham Price and Stock price is the stock price being some 50% higher the Graham Price. By this measure the stock price is relatively high.

When I look at the Price/Book Value ratio I get a current one of 3.84, which is some 40% higher than the 10 year median of 2.77. This would point to a relatively high stock price. The current dividend yield at 2.96% is almost 10% higher than the 5 year median dividend yield of 3.26%. The current yield is just below the 10 year median low dividend yield 2.97%. This would also point to a rather high relative stock price.

The analysts’ recommendations that I find are Strong Buy, Buy, Hold and Underperform (or Reduce). The consensus would be a Buy recommendation. One Buy analyst said that he views Enbridge as a prudent pipeline operator. He expects that it will grow and that this will drive up the share price. The 12 months share price is given as $42. Another 12 month stock price is $40.38.

No one says anything bad about this company. Many think it is run well. One analyst said he expects the company to keep chugging along. I can only find one analyst that says the stock is overpriced. (My spreadsheet certainly says it is overpriced on a relative basis.)

Zacks Investment Research has a recent blog on why Enbridge Inc. is a buy. He mentions the solid dividend of 2.9%. Another analysts with a Hold recommendation said the dividend was only 2.9%. Another analyst thought you should not buy the stock until the dividend was closer to 3.5%. (The 10 year median dividend yield is 3.3%.) The web site Clean Break comments on Enbridge’s investment in Morgan Solar. CNBC has a 9 minute video clip on Enbridge including an interview with the CEO. Going to the site you will see a short commercial.

My Own Adviser blogger thought that Enbridge was a great stock for a DRIP. Dividend Ninja addresses the fact that utilities have high DRP and Debt Ratios. This includes stocks like Enbridge. Also, the Loonie Bin Blogger talks about his investment in Enbridge.

The CEO is also leaving Enbridge before the year end. See item on this at Akiraline. And is Rafe Mair reading too much into this?

I plan to continue to hold my shares of this company. I think that it is a great company and I do not sell just because a stock is overpriced. The stock market generally over or underprices stocks all the time. All the same, I would also like to see better debt ratios on this company.

Enbridge is focused on three core businesses of crude oil and liquids pipelines, natural gas pipelines, and natural gas distribution. They operate in Canada and US. Its web site is here Enbridge. See my spreadsheet at enb.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.

1 comment:

  1. A return of 20% per year????
    I am happy to have this one in my portfolio than! :)