The Canadian Investor - The Bull and Bear Case for Enbridge with The Dividend Guy

Episode Date: October 2, 2023

Simon is joined by the Dividend Guy himself, Mike Heroux. Mike hosts two podcasts and is active both on youtube and Twitter. During the episode, Simon and Mike go over Enbridge as an investment and whether it is a good dividend play going forward.  Symbols of stocks discussed: ENB.TO Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense. Mike’s Twitter: @thedividendguy Mike’s youtube channel: https://www.youtube.com/@DividendGuy/featured See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Bélanger. Welcome back to the Canadian Investor Podcast. I'm here today with a great guest, Mike Heroux. Is that correct? Yeah, that's correct. Well, it shows that you're French, Simon. Yeah. Yeah, I know you say it a little differently when you talk in English. But yeah, Mike, I know you're primarily a dividend investor.

So do you want to tell our listeners who might not be familiar with you, you know, what you're about, how you got started? I know you started, well, not started. You bought a blog in 2005, I believe, and made it your own after that. So just give our listeners a little bit of a background for those who don't know you. Yeah. So I started investing in 2003. Back then I was working at National Bank, a credit owner writer, became a financial planner after that. And I had this like buying and selling personal finance blogs on the side type of gig. In 2010, I bought the dividend guy. And then I realized that I needed a little bit more a structure behind my investing strategy. Because between 2003 and 2010,

I was just like buying and selling. You're making a lot of money. It's easy. And then boom, 2008 happens. I was doing my MBA at the time, lack of time, bought the blog, became a dividend growth investor afterward, because I realized that having a very straightforward strategy is a lot easier after that to just manage your portfolio and make your decision. So created, like starting to write as the dividend guy blog back then, shifted my entire portfolio for those two years towards dividend growth investing. And now I'm 100% invested since then, always in dividend growth stocks. And I eventually quit my job at the bank and created dividendstocksrock.com

to help people to invest with more conviction so they can enjoy their retirement. So it was all about cutting down the noise, making sure that you're going forward with a strategy that you're comfortable with. And for me, that worked well. And it's called Dividend Growth Investing. Okay. And I heard you also have a podcast. You forgot to mention that. Yeah, I'm actually all over the place. But yeah, so I have like a long form podcast that's called the Dividend Guy podcast. And I also have the Moose on the Loose, which is a 10 minutes daily from Monday to Friday, where I just talk about Canadian stuff. And this is what we're going to talk about today, right?

Yeah, exactly. So before we get started on Enbridge, because that will be the focus of our discussion, we've had the request a lot from people. You know, why don't you guys do a deep dive into Enbridge? Why don't you guys do a deep dive into Enbridge? And I know the business, I would say, decently well. But as we talk, I think we probably have some similar concerns about the business. And also, I find sometimes some of their financials a little bit difficult to understand. And I think I'm generally pretty good at understanding that stuff. So we can go over that.

But I know you have a dividend triangle. So do So we can go over that. But I know you have a dividend triangle. So do you want to go over that thought process? And then we can kind of go and transition into Enbridge? Yeah, definitely. So the way I approach any stock research, I always start by looking at metrics. And my favorite three metrics, I call it the dividend triangle because it has like three sides. So I'm looking at companies that will show growing revenues. So I'm thinking, well, if I'm looking as an investor, what I want is a thriving business. So a business is always able to find ways to grow sales. It could be by acquisition. It could be because they have their leader in the market share. They have a lot lot of Edwins, Tailwinds basically, and just find ways to grow their business.

So I'm looking at a trend for the past five years for revenue growth. That's the first side. The second side is once you're making more sales, well, you hope that that business will also make more profit. So I'm looking at earnings per share growth for the past five years as well. more profit. So I'm looking at earnings per share growth for the past five years as well. More importantly, the trend than the number itself, because as you know, earnings per share, they're an accounting principle calculation. So sometimes when it comes with amortization and other stuff like that, it is non-cash related. You can kind of like play around a little bit. We saw with Canadian banks over the past 12 to 18 months, they're raising

their provision for credit losses that hurts their earnings, but it's not real money that they're losing. So looking at a trend for five years will give you a pretty good idea if the business has good margin, strong pricing power, and is able to generate more profit as revenue grows. And once you have found a company that grows their revenue, grows their earnings, well, what I want as a dividend growth investor is that business to share the wealth with shareholders. So I want to see the dividend growing at a pretty much similar pace. So looking at the trend for the dividend growth will also tell me the level of confidence from management in their business model, because obviously the dividend from the management perspective is pretty much like a debt.

It's like a payment that they have to pay quarterly and it's not giving them anything. So if they do not feel they can continue to grow their business fast enough to sustain a strong dividend and then increase it like by 5% every year, they're just going to slow down the dividend growth. So that would also help me to raise a red flag saying, okay, so if revenues are stagnating, earnings are not going towards the right direction, and then we see the business increasing their dividend by 7%, 8%, and then it slows down to 5%, slows down to 3%, and then you have that symbolic one penny dividend increase. Now it starts to raise a big red flag. So I always use those three metrics to set the base, to determine if I want to do a deep dive into a business

to understand it and eventually maybe buy some shares. Or if the dividend triangle is not strong enough, I just pass right away because there are too many opportunities on the market. And you need to find a way to cut down a little bit and make it simple for your buying process. Yeah, no, I like what you said, because it's a starting point for you. And I think that's really important for people who are starting to invest because you can look at the metrics, you might have some very good metrics that you're looking at and a good thought process. But if you don't, you know, do a deep dive into the business after that to understand it.

And quick question, do you look at free cash flow per share or is that something you don't really look at? Because I love that metric. Yeah. Personally, just because of what you mentioned, because earnings, I mean, accounting principles, right? They're not necessarily, you know, directly impacting what's coming in and out of the business in terms of cash. I always look at it as like a second layer of financial metrics analysis. The thing with free cash flow metrics is it's a little bit less consistent in the sense that from one quarter to another, the business could have like major expenses. And then your free cash

flow goes from negative to positive. So it's a little bit harder to follow. And most of the time when you have a business with a very strong dividend triangle, the cash flow will follow as well. Because like one metric is really hard to like, you cannot hide behind accounting principles for so long. You maybe do that for a few years. But then after that, if there was some kind of tricky amortization you can play with or something like that, well, at one point, it's going to disappear. But yeah, definitely cash flow. And it comes down to that. If you want to make sure that the dividend is safe, you need to make sure that the cash flow is there. Because without the cash flow, there's no money coming out of that bank account. Yeah. And that's a great point. Free cash flow is very hard on a quarterly basis.

It levels out more when you start looking at it on a yearly basis. But yeah, definitely, I agree with you on that. Well, now on to our main topic, Enbridge. So do you want to give us just an overview of the business, what they do? We'll kind of start from there. And then we can look at the dividend debt levels. I know that's a concern of yours from what I've read from your work of mine as well. So we can go that and talk about the

sustainability of the dividend too. Yeah, and I've received a lot of questions about Enbridge dividend safety for the past few years. It's quite confusing. So let's start with the beginning. Well, Enbridge as a start is in the energy sector. So a lot of people will think it is a utility stock because they have a bunch of pipelines, but it is still related to the energy sector because they have like long-term contract but again they are still dependent on uh the crude oil price because whenever it goes down well technically their client even if they have like long-term contract they might eventually not use the full power of their uh of the of the pipeline and then pay a little bit lower. So market cap at almost $100 billion. So definitely not a small company. Very generous yield at 7.6 right now at the time of recording. 28 consecutive years of dividend increases.

So a lot to love for income-seeking investor. Now we're going to talk about a transaction they're about to make. But before this transaction, so as of today, we're talking about 57% of their business that is coming from crude oil transportation through those pipelines. The rest of it is mostly gas transmission and gas distribution. So the difference between both is just that you have like the transmission that is really moving it from the suppliers to like big distributors.

So kind of like a wholesale type of business. And then the distribution part is really the retail part where you actually distribute natural gas to customers, to businesses, to industrials as well. And then they have like a very tiny portion, 3% of their business coming from renewable energy, which is not much. I think it's just to kind of their business coming from renewable energy, which is not much. I think it's just to kind of like, I don't know, make it like more ESG friendly type

of thing. They used to have a lot more. They sold those assets a few years ago. Now they're slowly going back. But I mean, at 3% of their business, I don't think it is quite significant. So it's really a large, very solid cash flow, very easy to predict the cash flow coming from those pipelines. A lot of people will compare Enbridge to TC Energy. So Enbridge right now is a lot more about crude oil and TC Energy a lot more about natural gas.

But one advantage that InBridge has is most of their clients, they sign contracts like for 20, 25 years. So it's really, really long term. Obviously, you have like inflation escalator that are inside this. So you don't have to really worry about that. Like all the clients who will pay a little bit more every year. And one thing that is amazing is they have a take or pay type of contract. So even though you don't use the pipeline because you decide, okay, so that the oil price is not high enough, what the client will have is they have to pay to reserve their space on the pipeline.

So it's really like when you're paying your pass to go on a toll road, whether or not you use that toll road, you still have to pay a minimum fee. So this is the way it works for the contract. Is it the kind of, is there a base fee and then they pay more based on usage? Is this kind of a combination or it's just a- That's correct.

Oh, that's great. It is really a combination. So there's a minimum price you have to pay to reserve your spot in this in the pipeline and then if you use it then you pay a little bit more so that's why i said it is not as related and dependent to the oil and oil and natural gas prices because when it drops they're still going to move oil and and regardless what's happening there's's that base need that we will consume. So they are assured to a certain level of cash flow. But eventually, if we still have an oil barrel at 50 bucks for three years in a row, you're going to see those revenues going

down anyway. Okay. No, good clarification. I think it's really important for people to understand because there is that stability in revenues, but there's basically a floor for Enbridge revenues, but they may not be maximizing the revenue necessarily depending on the demand. Yeah. That's correct. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual

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So that's kind of a good overview of the business. I know there's the acquisition that made the headlines not too long ago. the story behind their moves, their business model, what they're doing, and then the numbers to see, well, is the numbers are backing up that narrative or you just have a great fairy tale with nothing to back behind. So the narrative here in the acquisition, if we forget about the debt for a moment, and I know we're going to talk about it. Oh, yeah. For sure. I'm pretty passionate about that part. But if we forget about the price they pay, actually, it's a decent price in terms of the multiples.

It's pretty much in line with the previous transaction that happened in the industry. But the move is quite interesting because they're moving from massively being a crude oil pipeline to something that will become 50-50%. So 50% oil, 50% natural gas. So they're buying a lot of like transmission, natural gas transmission utilities. They diversify also because they used to only distribute natural gas in Ontario. Now they're going to be in Ohio,

in Utah, Wyoming, Idaho, North Carolina. So it is a great way to diversify their business. And also kind of like a message where probably that management thinks that the oil transportation may eventually fade away. Definitely not ESG friendly. So they may face even more regulation hurdles. While natural gas seems to be a more stable business for the future, something that is a little bit more interesting if you want to continue to expand your pipeline. So that is also quite interesting. Management says that it is going to be accredited, that they expect their EBITDA. And we're going to talk also about the fact that they always talk

about EBITDA and not like their real to talk also about the fact that they always talk about EBITDA and not like their real earnings because they always put amortization aside. That's okay, because they're capital intensive. But ignoring the debt payments, I'm kind of like having a problem with that too. But anyways, they're saying they expect to see their EBITDA grow 5% at an analyzed growth rate going forward. So it doesn't really change their business model. Another positive side is whenever you invest in natural gas structure, it is very easy for them to predict how much cash flow they're going to receive. Most of it is regulated. So they basically know if they put a billion dollars in CapEx in their natural gas pipeline structure,

they know exactly how much they're going to make again. So if you borrow at 7%, but you know that you're going to generate 12% in returns in terms of cash flow, you know that you'll be able to pay off your debt. So it kind of makes sense from that point of view. The problem, obviously, is the debt. I just wanted to add something. Yeah, exactly. It's something quick just for those who are not as familiar so ebita is basically earnings before interest taxes depreciation and amortization um so it's a term pretty common term uh it's not a gap metric but pretty widely used

where i start having an issue is when they have like adjusted eDA, where it's like they make a whole sorts of adjustments. And when you think about adjustments, you have to read what their adjustments are because an adjusted EBITDA for Enbridge will be very different than like Pinterest, for example. I'm just using two random example, but you have to look at what they actually remove or make adjustments for because it's not a consistent rule.

It's not a consistent rule. And on top of that, I kind of like understand the point where you have a capital intensive business such as Enbridge, meaning that they need to invest massively to maintain their pipelines. And whenever they make extensions or they make a new pipelines, obviously it's going to have like a huge amortization. So those investment will affect their earnings. And on that part, it would be unfair to say, well, now they're losing money on their financial statement because they have negative earnings or very small earnings because they spent like $5 billion creating a new pipeline. Obviously, that pipeline will generate a lot more cash flow in the future. And considering this makes sense, where I kind of like not agree with them at one point is just to

focus on that metric where you also forget about all the debt level and the debt payment and the interest that is being paid on that debt, especially when you consider that over the past 10 years, we went from a total long-term debt around 23 billion all the way up to now roughly $80 billion. And now they come up with that and we're talking about 240% increase in 10 years.

And now they come up all super happy to say, oh, we're going to add a little bit more. We're going to issue more shares, which is going to dilute the value. And we're also going to take on more debts because we're talking about 19 billion Canadian dollars for that acquisition, which is a mix of issuing shares, creating more long-term debt, and getting the debt from those assets as well.

So long story short, we're not paying off any debts here. And if you look at the debt graph, when you look at those financial statements, you can see that over that past 10 years, it's either going up or stabilizing. But there's no clear sign at one point management says, oh, yeah, you know what, we're going to start paying off debt. It kind of makes sense in 2014, 15, 16, 18, when the interest rate were super low. Today, it's definitely a growing problem. And the market didn't like that transaction mostly because of that. So from a strategic point of view, in terms of diversification, it makes sense. The price they pay makes sense as well. But it's not because you're getting an amazing deal on a Tesla that you could pay $25,000 when it's worth like $50,000 that you should actually remortgage your house to buy

that Tesla. That doesn't really make sense, especially if you have two cars in your driveway anyway. So Enbridge is just like taking another bite of another cage, but clearly overweight in terms of that at this point. Yeah. And I have like a graphic pulled up for those following on video. And it's just the interest expense since the 10 years you're talking about. Obviously, you know, for a while, interest rates like you were showing, you know, quite low. So it was manageable. But now as interest rates are going up, it can become a problem. And even if the transaction makes sense now as they need to refinance that debt. And, you know, Jerome Powell came out a couple of weeks ago and basically said that, you know, rates are going to stay high for longer. And I think the probabilities and,

you know, you take that with a grain of salt, but probabilities is not that, you know, there's not going to be any rate cuts until at least the second half of 2024, potentially later. That's what the market is pricing in. So as Enbridge starts refinancing that, and I think one of the issues I found looking at their statement is they have the footnotes like everyone else. Oh, let's have a look at the debt, how it's structured. But you have these, you know, debt amounts that they say the average rate. And they say, oh, there's a bunch of different debt coupons in here. But they don't say when it comes to maturity, they just give a range of 2023 to like 2037. And I find that a little bit alarming, because I'd like to know when they're coming to maturity, because I, it's hard to

predict then what their interest expense will be in the future, even on top of trying to make assumptions with what interest rates will be. Yeah. And to add a little bit more on this story, I bought Enbridge in 2017 when the company was actually growing their dividend at 10% rate. the company was actually growing their dividend at 10% rate. There was a lot of drama with the expansion of line three,

the replacement, and then line five. So I thought it's a pretty good timing to buy something that is a little bit a rocky boat, but at the same point, very predictable cashflow, as I said earlier. So I thought good point, good entry point, made that acquisition. But then at the beginning of 23, I did a full analysis looking at the interest payments. Because as you said, it's hard to understand their debt structure, but the interest paid every quarter. That's pretty clear. They cannot really hide behind it.

And what I found is what it was increasing every quarter. And obviously now they're adding more debts. They will have to refinance a part of like the existing debt on top of that. And it's always going to be more and more expensive. And at one point in February of 23, I decided to sell my shares because of two reasons. first one, that debt burden, which, as you know, when you raise interest rates, it has a lagging impact on the economy, but also on companies balance sheet, because most of their debt is already secured right now. But at one point or another, they will have to renew part of it. And this is where the interest payments comes higher and higher. And while the business

continues in their presentation to focus on EBITDA, which forgets about that debt payment, well, then it's quite convenient where you're kind of like hiding under the carpet that you're paying more interest rates, more interest payments every quarter. And the business is slowing down a little bit because of that, you see that now the dividend is now the increases are around 3%. And I'm kind of starting to get a bit more worried about that going forward. Thinking and I think we're going to move on to how they calculate their payout ratio soon, because this is quite interesting as well. Fascinating, actually. It requires a lot of creativity. So while they claim that their payout ratio is always between 60 to 70 percent because they use an adjusted way to calculate their payout ratio. I mean, might well, they show 28 consecutive years of dividend increase where I will point to me, say, OK, I know I'm not necessarily comfortable with the distributable cash flow payout ratio they use, but it seems to be working.

But at one point, the problem with those kinds of metrics is it seems to be working until it doesn't. And this is where you see a dividend increase of just 3% every year starts to slow down. You know that the interest payments are going to continue to be higher every single quarter going forward for a while. Bank of Canada and the Fed have been adamant about that. We're going to kill inflation and then we're going to look at interest rates.

So no matter what's going to happen, if they need to crash the economy into a wall, they're going to do it. And at that point, this is where Enbridge situation may be quite difficult to manage. Yeah, and that DCF, so distributable cash flow, right, is what they use. So why are they using that metric? Like you have utilities and even REITs that will use funds from operation. That's pretty common for those type of capital extensive businesses.

And I agree with you, like CapEx, reoccurring CapEx for maintenance should definitely be included. But I would also go as far that a company that spends so much on CapEx on like in excess of maintenance and just keeping in good functioning at some point, you have to factor that in a little bit because you look at their financial statements and CapEx are just through the roof. And it's not like they're selling assets very often.

I look, they do sell some, but it's not very frequent. So do you know why they use that? I know some will use like CAD, which is cash available for distribution, but I've never seen any, like I haven't seen any other business, maybe there are, but using that DCF metric. It's quite unique for Enbridge.

I would say when you go into the industry sector, we're going to talk more often about the cash that is available for distribution, which is a similar way. But what I like about Enbridge is they're pretty clear and consistent in the way they calculate it. So that is one thing you may agree or disagree or be not comfortable, let's put it that way, with the way they calculate it, but at least it's consistent. So when you look at it, they're kind of like using the funds from operations. So all their business, how much they're making, and then that creates their, and then they make a little bit of adjustment for the EBITDA.

So already you're just like, yeah, I don't like that part. And I'm 100% with you. And what I don't like is after the adjusted EBITDA, they take off like the financing costs, which they kind of like basically telling you, let's focus on the business cash flow as an anything that is about financing about all our projects. We're going to treat that aside. It seems like a bit like how government plans their budgets, which actually never makes sense. how government plans their budgets, which actually never makes sense because they're just like, Oh, but those are like two different columns.

So you don't have to look at both columns at the same time. You look at the columns of luck cashflow, which is great. And, and then the other, the other column where all the bad stuff happens, you don't really have to worry about this part because we're going to continue to make more cashflow moving forward.

And, and it's kind of strange because even credit agencies, they give pretty much a stable rating here. They don't change it too much as well. So I'm guessing, well, at one point, as long as they're consistent, it makes a little bit more sense. Now that interest rates are a lot higher than they were for the past 15 years, I think this is where the problem will come out. And then the fact that they're using a metric that completely disregard all impact from financing and interest rates will eventually bite them back for that reason. and interest rates will eventually bite them back for that reason. Yeah, I like that you talked about the credit agencies because, you know, I've been very critical of credit agencies just because, you know, you go back to the SVP Silicon Valley

Bank and they basically didn't flag it until like everyone knew about it. Then they downgraded to basically default. And, you know, you can go back to the great financial crisis. And if people have seen the big short, they kind of have some interesting scenes about that where they basically say, well, if we downgrade the banks, our competitors not, so we're going to lose the business. But having said that, they are important because it does impact what kind of interest they'll be able to get when they do finance their debt right and i had a look at enbridge and it is investment grade so you know that's not too bad that's fine

but it's definitely towards the bottom of investment grade so there's not that much leeway i think the big three credit agencies have them at their third lowest rating of investment, great out of 10. So it's not alarming. But I know after the announcement of the acquisition, they did say that they had some concerns about that in terms of the additional debt. And we can talk also about the dilution. I think it's what, 4.3% dilution that they'll be issuing shares. I calculated roughly if my math is correct. And on top of the delusion, you also have to consider the fact that it will have to pay a lot more dividends. Yeah, exactly. Because those shareholders are not going to spit on that.

They're not going to disregard that 7% yield. They're going to want that dividend payment. payment so from the the credit agencies perspective i think what enbridge uh like the reason why they are still investment grade is their long-term contract and the quality of their their clients obviously we're talking about like the big oil and gas companies that are also have like a lot of like financial needs to to pay uh the pipelines and the fact that we need energy. So at one point, it's really hard to get out of that business. But the thing is, the credit agencies will not tell you if the company is able to continue to pay the dividend or not, because that is something completely different.

And they probably see that saying, well, at one point, we're just going to call management and say, well, if you don't want to see your credit score going down and then being able to find it, like being forced to finance a higher interest rate, what's going to happen is you'll have to cut your dividend because that, as I mentioned earlier, it's like a debt from the business. And if they have to cut or arm to save the body, it will do that. Like their main concern is not the shareholders well-being or their retirement. It's rather, well, if the business is taught there and we pay billions in dividend every year, well, we might as well just cut that off. And then like, as they say oh we're gonna gain financial flexibility we're gonna strain at our balance sheet we're gonna be a better enbridge they're gonna go with this like

uh big show and and might as well at one point just stop increasing the dividend first so i would i would definitely look at that and um at beginning of 2024, because this is usually when they announce their dividend increase. But that was a big concern for me at this point, especially because they're adding more debts. It sounds a little bit like what happened with Algonquin when they decided to get on to more debts to buy Kentucky. Might as well, Algonquin situation had like 25% of their debt on floating rates, so variable rates. So obviously, they got hit a lot faster than Enbridge. But at one point or another, if you're not able to

generate more cash flow and pay down that debt, you cannot just continue to borrow money forever. They like the more we talk about it, the more it sounds like the government actually. Yeah, yeah, it's definitely a big business. And you know, I agree with you, I think at the very least, they should stop the increases and focus on paying down debt. I would even advocate to be proactive and potentially cut the dividend a little bit. Short term paying for longer term health of the business. I mean, I'm a big proponent of that. Unfortunately, dividend payers that have a long history tend to wait the very last minute to cut the dividend because they know a lot of investors are into the stock for the dividend payment. I mean, you mentioned Algonquin. Intel is kind of a different case because their revenues are not as consistent

as Enbridge, but still the writing, we were talking about it. And I think like two years before, I'm like, why are they not cutting the dividend and investing the business? Because their competitors are just, you know, crushing them and it's going to start hitting them. And obviously when the writing was on the wall, I think they had like an earnings call. They basically said, oh, you know, it's fine. And then two months later, they cut it. It's kind of strange the way most CEOs do that. And a lot of like long-term investor will remember that story happened with Kinder Morgan, where the CEO came

out and say, everything is fine. All is good. And as you said, a couple of months after, well, guess what? Oh yeah, we're going to gain that financial flexibility and we are going to cut the distribution, but don't worry. We're just going to be a better business. But yeah, I think at this point at like now more than 7.5% yield, it's starting to scream as the dividend may not increase. And as you said, probably it would be better off to cut it off. At this point, if you still look at their DCF payout ratio, it's still in line around like 65% all the time. So that still makes sense. But at one point, they will have to consider their debt payment because if you don't, what really happens is you end up getting more debt

just to pay for the interest and to pay for your dividend. And that is definitely not sustainable. At one point, you have to come clean, look at your balance sheet and say, you know what? We cannot afford to pay that kind of dividend anymore. Yeah, no, I think you're right. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using

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details. That is questrade.com. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs reached out to work with the podcast. I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get

global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. In terms of a bull case, so obviously, I've been wrong lots of times. I'm sure I'll be wrong lots of times in the future. Anyone who invests and is never wrong is just plainly lying to you.

you know, invests and is never wrong is just plainly lying to you. That's the way I see it. So what's the bold case? The way I see it is probably one of the big advantage for them, obviously, is regulatory. So they have, you know, kind of that moat. But also, I think there's been a lack of investment in pipelines, refineries in North America. So that may give them some potential pricing power when they renegotiate those longer term contracts, if there's less availability. I mean, we saw how expensive the, speaking of Kinder Morgan, when the federal government bought the Trans Mountain Pipeline, I think they're about to finish it, fingers crossed. Yeah, but we just see how difficult it is, how much money it costs.

So I guess that could be a potential bull case for Enbridge. Yeah, the quality of their asset and the fact that it became even harder now with regulators. And we saw like Keystone XL that got canceled for TC Energy that gives even more room for Enbridge for negotiation. So they have lots of pricing power, predictable cash flow. We need pipelines, like it or not. That's not even a question. We need oil transportation. We need natural gas transportation. So I think that from that perspective, they're in a very solid place. The only thing is, if they stop getting more debts and then just get to straighten their

balance sheet, they're going to be a very solid business for years to come. And when I announced to my members at Dividend Stocks Rock that I sold my shares of Enbridge in February, it was not because I feared that the dividend would be cut. It was more about the fact that I focus on dividend growers, like strong dividend growers. And from my perspective, I saw the interest rates as a big Edwin. And also the fact that when I bought the stock in 2017, it was growing its dividend by 10% per year. And then obviously the business changed. I knew it was not going to stay forever,

but going from 10 to three, it's a pretty massive drop in terms of dividend growth policy. That has been like for the case for two, three years. So I can see the business is slowing down. So it's not a bad business right now. At this point, I would say it's probably like what I like to call a deluxe bond

in the sense that you still have a very... Yeah, it's a generous yield. I've heard you say that before. Yeah. So generous yield, a slight dividend increase and do not have much expectation for the capital appreciation. And if those are your expectations for Enbridge, they're still valid today. The only red flag I would say is now watch their quarterly report very closely, making sure that those interest payments do not start to wipe out all their room for potential dividend payment. But at this point, I don't see Enbridge cutting off their dividend. Obviously, the transaction we talked about today will close towards the end of 24. So there's a lot of things that could happen between today and the end of 24

when they get onto more debts and issue more shares. So it's more a type of business where if you're looking for a stable income, this is what you're going to get today. where if you're looking for a stable income, this is what you're going to get today. The bad news are pretty much priced right now, obviously with a higher yield of like 7.5%. The market would not be that surprised at one point if there's no dividend increases in 24, but I would definitely follow it like quarterly

and I would probably lower my exposures. So if you don't want to sell, probably like look at how, like what is your exposure to risk? If you have like 10% of your portfolio in that, then you have a pretty solid exposure to risk of like what could go wrong. But going forward,

the quality of their assets, their ability to pay the dividend short term is still very strong. It's just a matter of like making sure you follow it closely. Yeah. And maybe I'll say one last thing that could be a bit of a tailwind for them that kind of a bullish case. But, you know, we have the liberals that are in power here in the US, it's the Democrats, and they tend to not be very favorable for pipelines and new pipelines,

right? So if those, you know, if the Conservatives come in in Canada, or the Republican in the US, you can make a case that would be a good thing for Enbridge, because it could offer some growth opportunities. You know, I think that's just the reality, their platforms tend to be a bit more friendly to the energy sector. So that's something that people could consider. Obviously, it's out of your control, who comes into power. So it's not but it could be. Obviously, it's out of your control who comes into power. But it could be something that plays in the favor and bridge. But I think something that's against them right now, and we discussed that a little bit before, but I mean, you's say before a year ago, I mean, that deluxe bond that you're talking about, I think, made a whole lot of sense because people wanted to get some return or some dividend payments, some income.

But now they do have that option where they can basically park in whether it's U.S. Treasury bills or a high interest savings account in Canada. Like you can get above 5% pretty easily. And, you know, we can debate whether it's risk free or not. But in our current financial system, it is the risk free rate. Yeah, definitely. I think at this point, it could be a pretty good solution to replace some of those very high yielders. And let's not forget that Enbridge 10 years ago was offering a yield around 3%. So we went from three to seven. It's not just all dividend growth here. There's a lot of like the stock price doesn't move that much. And now the market starts to get worried. And while yes, the market is like bipolar, and we should never trade based on the performance,

that the market will also send us some kind of like clear signals that something is wrong. And maybe it's time to do your own work again and do some calculations. Yeah, yeah. And I love that you talked about allocation, too. I think that's really important. We talked about it like it's one of the most, in my view, the most important tools that you have at your disposal to minimize risk because, you know, I know people like to invest in growth stocks or, you know, deep value because they see value, whether, you know, there's a high dividend or whatnot. But, you know, you can minimize that risk with adjusting the allocation.

There's a big difference between a 2% allocation and a 10%, like you just mentioned. Yeah, definitely. I don't, like, if if it's a small relatively small to medium position in your portfolio i don't think that enbridge is is like that risky but again if you're like falling falling in love into income stocks like this then it come it becomes like a real problem no perfect was there anything else you wanted to add on Enbridge? I think that was a pretty good overview. Yeah, actually, I would say that if you have those kind of concerns with Enbridge, you should also take a look at TC Energy's balance sheet. It's not as heavy in terms of debt, and obviously they're with natural gas,

so the ESG risk is a little bit lower. But then again, one of the main problems that we haven't addressed, but we're going to do that quickly, is for all pipeline maintenance and new projects, they also suffer from labor shortage, like cost of raw materials. So the inflation on all the costs aspects of those projects are also hitting them very hard. And the delay in some of those projects, we were talking about the, the, the government's project with the pipeline, which is maybe never going to end up at one point,

but that inflation is real due to labor shortage and the cost of raw materials. And that is also going to affect the profitability of future pipelines projects. So just have to be a bit more cautious about all of that, even though it's very stable, and we need it, it doesn't necessarily mean that it's going to make a lot of money. Yeah, I can tell you Kinder Morgan leadership is probably high fiving about selling that pipeline to the federal government out like

the money pit that they probably would have like spent on that and probably would have had to sell it regardless in the future but uh no that's a great overview before i let you go mike uh you know where can people find you i know you're on twitter and i know you like you want to tell people how to find you if they're interested in the work you do uh yeah so on twitter it's the dividend guy you can definitely i mean if you're listening to this podcast you're probably into investing podcasts so i I have The Moose on the Loose and The Dividend Guy podcasts. And I do have a membership website that focuses on dividend growth investing, which is called Dividend Stocks Rock. So you can guess. Big fan of dividend payers, dividend growers, because just the income is not enough.

You need some growth to make sure that you retire happy. No, that's great. Well, thanks for joining us, Mike. We'll have to do this again because there's one thing I know, Canadians love their dividends. So we'll definitely have to have you back on and probably look at another company. So thanks for joining us. Merci beaucoup, Mike. And I hope to have you soon back on the podcast. It's been a pleasure, Simon. I'm looking forward to it. Maybe talk about

Scotiabank and the other banks next time. Oh, boy. Okay. Yeah, I'll bring it. I'll really bring the heat in case people didn't think I did this episode. But yeah, thanks a lot. We'll have to do that soon. Cheers. The Canadian Investor Podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.