Investment Q&A

Q: I would like to start by stating that you are very patient, answering similar questions about same stocks over and over. My question is no different. I have been considering a position in Enbridge and have been hesitating for some time now.

Its price has decreased quite dramatically in the recent past and this may (or may not) be a buying opportunity. From all the posts I`ve read, and there are many, it is clear that this is a buying opportunity (but so was it at $50+). Some concerns that I have follow:

Debt. How much debt is too much? I've made (big) mistakes with GE and others. I am trying to learn from my errors, from your input and from the community at large. My understanding is that the leverage ratio is quite high. Interest rates are on the rise. Debt (with the exception 2015 to 2016) has continuously increased during the last 5 years (where it is almost twice as large today as it was 5 years ago). In 2016 the company increased its cash balance by approximately $1B (vs prior year) but still has about $65B in debt. How long will it take to possibly pay this off and with rising interest rates are we at risk of potential default in the future? I am a long term investor and would hope to avoid surprises down the road.

Retained Earnings. This number has dropped consecutively over the last 5 years. I do not think this is a positive sign.

P/E ratio. In my opinion, this is not a growth company and has quite a high P/E ratio. Albeit net income and cash flow have increased, revenue has not really changed much over the last 4 years. At end of 2016 its revenue was a bit higher than 2013 but lower than 2014. Numbers should increase at both the bottom and top.

Any additional commentary, over and above that already expressed in numerous other similar questions you've responded too is appreciated. We must be missing something. You must see something that we don't see. It is also possible that we are over analyzing this. I mentioned a few concerns above (ex. P/E ratio) and could have found other concerns but you may be looking at specific ratios/mgmt/new business/..., otherwise every company would probably have problems. Finally, would you be a buyer of this company at this time and/or would you be buying a competitor in its place/why?

Thanks again. I am quite sure there are many people like myself that read your input, use it to make investment decisions but even more importantly, we use it to further our own abilities to make sound investment decisions, and we thank you for that.

Q: Hi 5iResearch Team,
I have held a position on ENB for 4 plus years now and it has been a disaster these past couple of years. I am thinking of swapping ENB for AQN and would like to have your comments on this intended move. Much appreciated.

Q: hi
Joe asked about your top ten juicy dividend payers. Some are barely in the 3% zone.
Are you preferring these because of safety? Growth?
Are the higher yields from the names I listed at risk of cuts? There are quite a few out there yielding 5% +
Thoughts on these higher yield names?
Thank you!!

Q: Peter & Associates

Using Enbridge Inc. as a bellwether, yearend numbers from 2000 to 2009 produced the following averages: A mean P/E of 16.5, (several years in the 13 range) a growing dividend with an average yield of 3.1 % representing 50% of earnings and 75% of 10 year TBs when they ranged from 5.4 to 4 %. A check of a recent brokerage report places its debt level at 60% which seems well in line with those over the referenced period.

Clearly the dynamics have changed. Might what is playing out in industries which traditionally need constant access to new capital, be it common or preferred shares are seen as better planning tools providing them with greater option flexibilities than fixed income alternatives? Whereas interest payments must be made, dividends must be declared? With concerns being expressed, a 10 year rate over 3% could do more harm than good, is ENB oversold and at this price too good to be true? It would seem rates would have to rise a lot to actually come into competition with the yields ENB equities offer.

If someone were investing in an ENB for yield, it would seem logical to suggest they would also seek moderate capital risks, far less than what this one has experienced. Is a projected forward P/E of 20 and a dividend over 6% which ENB claims will increase, warning signals? Assuming it is a good bellwether security, how much more downside could this stock potentially see and/or how likely/ risky the need to eventually cut the dividend ( common)? Albeit a very different industry and dynamics, energy stocks had to make cuts to reflect their financial realities; even non CAD banks went through well documented challenging times. The point, no industry is immune from economic realities and their balance sheet realities. Concerns over debt are being expressed as rates rise.

Having a well balanced portfolio is a protection but, so called bond proxies are found in multiple sectors and collectively can add up to an important exposure. There is an expression, things tend to eventually revert to their mean. That said, might we be seeing the start of that occurring since these are not generally seen as growth stocks where earning growth is the offsetting factor to deal with these high ratios?

Would very much appreciate your insight. Thank you.
Mike

Q: Hello Peter.
How does an investor know he/she is a shrewd investor or a Sucker(buy from another investor who gets the price direction right)? It is starting to feel like Holders of our prime Canadian income investments have sucker written on our forehead.

The question here for me is how to create an investment portfolio that gains from where the capital is going instead of holding investments seeing capital retreating. The current reset of Income stock prices has been quite stunning; ENB down 14% since Jan 4.
It would be great to buy ENB with a 6% Dividend......But is it the same company everyone thinks of from days gone by or has it changed and without investor positive sentiment and a stronger US$ .......it will continue to be burdened by debt and a lowering stock price?
In a diversified Portfolio holdings include income investments. But just because an investor is interested in the income stream, does not make it right to watch the capital value decline everyday.

What is it that makes buying ENB okay at $50 and then as it declined all the way to today's price of $43.11?
It kinda feels like a roll of the dice to bet on a higher price for ENB at this point in time.
What is it that makes buying ENB a shrewd investment at today's price and in the current market environment?

Thanks for the thoughtful answers in the Q&A.
Dave
(this question could have just as easily been about ALA, IPL, PPL, FTS or EMA)

Q: Hello Peter and Ryan,
I am thinking of increasing my weight to 6 percent each for Enbridge and TransCanada to take advantage of the weakness in stock declines during this week. Overall, i am down on both names but expect to keep them for 3 to 5 years as the dividends are great. My covalon technologies position has gone up alot and am thinking of selling half. Lastly, Alimentation couche tard does not seem to be getting too much attention on the positive side as the stock is simply building a base in the low 60s. I would appreciate your opinion on the four stocks please. Thanks very much.

Q: Though I don't think interest rates can increase very much, can you share which 3 or 4 utilities in Canada have the least amount (and most amount) of debt?
Thanks

Q: Hi All, is the dividend safe here with all the debt the company has?

Q: together these 5 stocks make up 10% of my portfolio. not a terribly large weighting but enough that i have felt the recent decline. I understand the correlation between interest rates and these companies that are viewed as bond proxies. Since Jan 1 2018 BCE is down 5.5%, BEP is down 7%, BIP is down 8%, TRP down over 9%, ENB down over 10% (all return % are excluding dividends). ENB is now yielding over 6% if their Q1 2018 dividend is extrapolated for the FY 2018. my question is at what point does one consider the decline overdone and step into one or a few of these? a 6% yield on ENB is looking attractive to me but do you think there is still more downside risk in these names?

Q: Hello team,

Do you think the sell off on these fine dividend payers is done? I want to buy some blue chip dividend payers (I have none) but I wonder if the impact of future rate hikes is already/completely priced in for these types of stocks. What do you recommend: wait a bit longer or just buy now? I am afraid of buying now and watch them go much lower than their current price. At what price(or multiple) each of these would be a pounding-the-table buy? Would you please order them in terms of your preference for a very long-term hold.

Thank you very much indeed!

Q: Could you please explain the significance of the difference in Price/Cash flow and Price /Free Cash flow in general and then apply this spacifically to each of these three stocks
As well, where is the best place to get ifo on price /free cash flow on these and other stocks in Canada

Thankyou

Q: SALES BY INSIDERS
I have seen some insider selling activity for the above noted companies. A few officers of Enbridge sold over 50,000 shares each in December. As well, I noted a few ALA directors sold over 15,000 shares each last month.
Do you view these insider selling activities as unfavourable?

On the other hand, another Energy company (IPL) had favourable insider selling activity, in my opinion, since there were only buyers and not sellers.

Q: Your opinion on Enbridge please for a long-term hold.

Q: Hello 5i.
I would like to ask about Portfolio Management as an Individual Investor.
This year I was going to implement an action plan that would engage selling at the point of stock chart breakdown......to help avoid 40% losses like Cineplex handed me in 2017/2018.

The Portfolio has been set up to be well diversified with 5i holdings and a host of other Canadian investments through all sectors.
It feels quite silly to just sit and watch individual names break up trends, breach 50 day and 100 day moving averages and continue to decline in price........taking down the Portfolio value each day.

Some of the names have been spoken about as lifetime holds but seem to be getting hit quite hard as some group of investors have decided to exit their positions.

With the cost of only 9.95 to enable a small investor to get out of the way, what is it about investing that sees recommendations implying Hold these names for the longterm?
(BAM.A, BIP.UN, FTS, PPL, IPL, ENB, BCE, PSK)
Watching 2017 gains slip away hardly makes sense to me.

What is 5i perspective on dealing with markets that seem to be taking away gains thru declining stock prices? How and When does an investor decide getting out is the right action (before I get to the point of maximum pain and then sell)?

I have had a few stocks go to zero. Clearly I can not determine the difference between a short term blip and a developing permanent loss.

Thanks for you insights
Dave

Q: Hi 5i Team

I'm interested in reviewing the dividend history of Canadian pipelines, utilities, reits and other income stocks over the long run, namely through recessions and interest rate movements (the tagged companies are representative). I'm trying to determine if the dividends remain fairly stable or tend to fall under these circumstances.
Can you suggest a source that would help by showing dividends for a company over the long run? Ideally, overlaying short/long term interest rates to save time.

Any help greatly appreciated.
Peter

Q: I have a 20% overall weighting in above names. At 57 do you feel this weighting is excessive? Thanks!

Rob

Q: Would appreciate your thoughts on the steady decline of ENB since December.

Q: I am reviewing my sector allocation and depending on how I place TRP , ENB, FTS and IPL, I can have up to 14.6 % of Equities or ~5% of Equities in Energy. Can you comment on the following and tell me if they are all in the Energy sector in your opinion : CNQ ( 2%), ENB(3%), FTS(3%),IPL(1%), SU(2%), and TRP(3.5%).

Q: Hello Peter,
It is a bit sad that shareholders of Canadian energy companies are not able to take advantage of the increase in oil prices as the stocks have hardly moved. I am assuming it is due to the restrictions on pipeline capacity. However, why are Enbridge and Transcanada down? I understand they are impacted by oil prices, but I am surprised at the reaction to their stock prices (downward). Comments please. Thanks very much.

Q: Do you see any particular reason for the recent weakness in the pipeline co's lately?. Is it NAFTA related and if so how?
Many thanks
Bob