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Investors Beware: Enbridge Not As Safe As It Seems

For many investors looking for a safe and steady income, dividend-paying Canadian pipeline companies have been a natural choice. And with a yield of almost 3 percent, Enbridge (ENB.TO 50.66 0.06 0.12%) would seem to fit the bill.

However, according to Toronto-based money manager, Patrick Horan, Principal at Agilith Capital, investors might want to look elsewhere.

“Enbridge is actually quite a dangerous stock,” Horan tells BNN. “Their growth strategy is at risk.”

For Horan, who is actively short Enbridge stock, the issue lies with the company’s dividend policy. Enbridge has raised its dividend steadily about 7-10 percent a year over the past three years, he explains. However at the same time, they have been issuing new shares to raise equity.

“This is a conflicting strategy,” says Horan. “Why raise the dividend and then go issue shares?”

According to Horan, Enbridge is using all its free cash flow to support the dividend. “There’s nothing in the tank for growth,” he says.


Horan also points out that the company is expensive compared to peers. “It’s trading at 25 or 26 times its earnings, but they actually have a lot of debt- around 6 times EBITDA*”.

“Their strategy necessitates continued access to both debt and equity markets,” Horan concludes. “If the equity markets are ever not there for them, they have no way of growing.”


So where should investors be looking if they want a good dividend stock?

Horan suggests IGM Financial (IGM.TO 51.01 0.71 1.41%). “If you want to be long the market, you’re better off in a mutual fund company or asset manager,” says Horan.

Horan says that if the bull market continues, IGM will be a big winner. “If markets keep rising, their assets under management will grow and they will gain from market participation,” says adds. “We think it’s well positioned to outperform the market.”

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