RE:ens premium aGood question marcrobert, but no easy answer.
My model after the close shows ENS at 99% of the NAV which equates to a 1% discount to the NAV
Math is math. The problem is with the humans.
When the fund manager (Middlefield) continually knocks the craap out of the share price of ENS, the ENS investors get frustrated and even angry. That is why we always see the share price of ENS dip further than it should after every Raise. I usually buy after every Raise for that very reason.
What is done is done. The real issue is what do you or anyone else do going forward.
I apologize in advance if the following is me just repeating myself, but here goes:
ENS has some pretty powerful advantages of owning ENB vs actually owning ENB
a) Cash flow: END pays out $1.56/year on an investment of less than $12 while ENB pays out $3.66/year. If you divide the share price of ENB ($51.15) by the share price of ENS ($11.84), you get a factor of 4.32. If you multiply $1.56 x 4.32 you get $6.74 which means ENS pays out 1.84x more than ENB. That is a big difference
b) Timing: The monthly payouts from ENS come in very handy when it comes to paying for living. For some investors, that doesn't matter but for others, it makes a difference
c) The dividends of both ENB and ENS receive preferrential tax treatment due to the dividend tax credit. However, ENS dividends are typically treated as about 50% return of capital. That means that about half of the ENS dividend is tax deferred until you sell.
The disadvantage of owning ENS is pretty much limited to panic selling of ENB during a crisis which could put the monthly dividend payment of ENS in peril.
Let's use an example of an older investor (65+) who is no longer working and receives CPP. The investor may also receive OAP in full or in part depending upon their income from the previous year. Many older investors have investment portfolios or savings when they retire which they hope will carry them through until the end of their lives. But, along comes a black swan event like covid with its supply chain issues and massive shocks to prices. All of a sudden, the life plan gets put on spin cycle. The investor then starts searching for ways to make ends meet and finds out about Split shares.
Many Split shares are pretty risky because they pay out far in excess of what they take in. As such, the big income comes at a cost of depreciating the capital of the investment. Paying out more than you take in as a Split is no different than spending more than you earn on a personal level. Unless the under lying securites apprecate more than the excess in payouts over time, the excess payouts drive the Unit value below $15 which means that the Common share side of the Unit doesn't get paid out at all. At that point, the Common portion of the Split becomes a very risky investment as there is never an assurance that the dividend will ever return.
Savvy investors love to play Splits when they are trading close to or below $15 Unit NAV threshold as they assume that the underlying shares of securities held in the fund (banks or high dividend payers or commodity based Splits) will recover and then the dividend gets reinstated. The impact on the share price of the Common shares of a Unit is quite significant when the NAV of the Unit teeters back and forth around the $15 Unit NAV threshold as 20% returns or losses can be achieved in a hurry. Our friend Experienced is good at this strategy.
ENS only pays out about $0.75 more than it takes in per share each year. As ENB increases its dividend over time, the shortfall decreases which makes the investment progressively less risky.
The real risk for ENS investors is that ENB won't increase in value enough each year to cover the $0.75 shortfall this year or what is likely to be a little under $0.70 nexy year and so on.
So, how do you figure out if ENB will be able to cover the shortfall each year. That is where you have to start looking at ENB as the driver of ENS. The management team at ENB is top notch in that they are conservative, disciplined, efficient operators, and most important to me, they are very transparent. With ENB, you know what you are getting.
So, what are you getting with ENB???
ENB sets minimum return of investment thresholds for every project they consider. Typically the threshold is 20% (the threshold for renewables is typically lower but are guaranteed by governments making bad decisions). Every year, ENB offers a range of guidance to investors and the company is extremely careful to meet the minimum of the range. The guidance comes in the form of different metrics. I place the greatest value on management's guidance for free cash flow growth which has been 3% in recent years.
If the cash flow grows at a rate pf 3%, as an investor, you can be pretty confident that the share price will grow at 3% or more unless a black swan event occurs.
Let's use $50 share price for ENB as a base because the math is easy. If ENB increases its free cash flow by 3%, investors can be pretty confidend that the share price will grow by at least 3% (likely much more but that topic is for another discussion).
If ENB's cash flow grows at 3% and the share price of ENB is $50, it is reasonable to expect the share price to grow by at least 3% or $1.50 per share. 44% of $1.50 is $0.66 which almost covers the expected $0.75 cash shortfall in 2024. Middlefield also uses option trading to enhance returns slightly.
All in all, ENS is a pretty safe bet which will continue to get safer over time as long as ENB doesn't do something stupid.
The upside for ENS when it comes to risk is that ENB hits a home run, or even a clean single on the Natgas Distribution assets they are closing this year which I think is the case. The reason that the Natgas deal is so important imo is due to the large size of the deal ($19 billion) and the fact that it continues ENB's strategy of moving away from transporting oil and away from Canada.
The downside for ENS when it comes to risk is that the adoption of renewables accelerates faster than expected which will eventually put half of ENB's business (transporting liquids ie oil) in peril. I have made ENS a core position because I believe that ENB has been doing exactly what it should be doing in mitigating risk. The folks over on the SU thread hate me because I tell them once in awhile of my belief that SU is not doing enought to mitigate risk. At least nobody here gives me shiite over my beliefs.