To outperform the stock market you have to identify a company whose shares are underpriced. In other words, you have to be right and the market, made up of thousands of other investors, has to be collectively wrong.
This is so difficult that many investors, including professional fund managers, simply throw in the towel and buy exchange-traded funds that track the market. A generous dividend yield, however, means you don’t necessarily need to look for undervalued stocks.
If the market climbs 7% a year on average, you could try to beat it by investing in a company that pays a 3% dividend, whose shares need only appreciate by 4% for you to match the market’s performance. And if the company has a long record of increasing its dividend, your margin of safety will likely widen.
We used the Financial Post’s market site to examine the table of companies that have increased their dividend the most over the past five years as a starting point for our search, focusing on those whose dividend yields at least 3%, and whose total return over the past five years was at least 15%, the result of a minimum of five dividend increases over the past five years.
That simple, visual screen led us to 10 candidates, too many to work with. Although large size is only tangentially related to safety, we opted for larger companies, narrowing it to a single name whose merits were confirmed during a visit from our local air conditioner service technician.
“I’ve more than doubled my money over the past few years with these shares,” the technician said, pointing to the Enbridge Inc. logo on the side of his truck. The energy distribution giant’s shareholders have indeed outperformed the market.
Enbridge has increased its dividend by 11.3% five times over the past five years and the stock, which split two-for-one in May, now pays 24.5¢ per quarter, yielding 3.2%.
The dividend, paid since 1952 and increased in each of the past 16 years, has helped shareholders enjoy a 40.9% total return over the past year, and returns of 121.8% since 2006.
By comparison, investors in the iShares S&P/TSX exchange-traded fund, which owns the 60 largest companies in the index, have had total returns of 17.4% over the past year and 34% over the past five years.
“We expect the company to continue raising the dividend at an average annual rate of 10% over the next three to five years, well above the industry average,” Lanny Pendill, an analyst at Edward Jones in St. Louis, Mo., writes in a June 20 report to clients.
Enbridge trades at a premium to the average price/earnings ratio of its peers, he said, but the premium is warranted “based on its heavy reliance on regulated operations and above-average growth prospects in both earnings and the dividend.”
The company’s dividend reinvestment plan (DRIP) gives shareholders a 2% discount when they use their dividends to buy more shares, and they don’t have to pay brokerage commissions.
Patrick Kenny, an analyst at National Bank Financial, has an outperform rating on Enbridge with a $33.50 target price. “
We reiterate our outperform rating ahead of the company firming up several organic growth opportunities stemming from the booming oil sands sector,” Mr. Kenny said in a May report.
In mid-May, the company reported net income of $393-million, or $1.04 a share, for the first quarter, up 15% from $342-million (92¢) in the year-earlier quarter. Adjusted profit, which excludes most one-time items, rose 5% to $334-million (89¢) from $318-million (86¢), beating analysts’ consensus estimate by 2¢ a share. The company said it remains on track to meet its 2011 adjusted earnings forecast of $2.75 to $2.95 a share.
Not that everything is going that well for Enbridge. On June 21, the National Energy Board told Enbridge to hold the pressure on its 440,000 barrel-per-day Line 2 to 80% of normal pressure, in case there are cracks on older, flash-welded parts of the line that Enbridge cannot consistently identify.
The previous week, the board issued a similar order about Enbridge’s Northwest Territories oil pipeline following a leak that had been reported May 9. Enbridge is hoping to build pipelines to liquefied natural gas (LNG) terminals, and to construct a $5.5-billion Northern Gateway oil pipeline that would bring Alberta crude to the West Coast, but native groups and environmentalists are opposed to the idea.
Despite the opposition, Enbridge has built $12-billion worth of pipelines over the past three years, Mr. Pendhill said in his report, and the company has $6-billion more to start service through 2014 and another $30-billion under development.
“Strong earnings growth should support strong dividend growth over time.”
rmorrison@nationalpost.com
No comments:
Post a Comment