ENS now trading at a discount to NAVThe NAV for ENS will take a hit of $0.13 today because of the January dividend payout. The NAV drops on the Record Date as that is the official date of ownership as opposed to the Ex-Dividend Date.
As I write this post (10:56 am), the Real Time NAV is $14.84 (after the $0.13 reduction) while ENS is trading at $14.83. That means ENS is now trading at a discount to the NAV.
ENS traded at a Premium to the NAV for the entire year of 2021 which makes it unusual in the world of Split Funds.
Are the days of Premium to the NAV over?
I suspect not because of the fact that ENB provides reliable growth in earnings and raises its dividend each year. Couple those facts with a 1.6 multiplier and the superior yield of ENS over ENB should inspire income (and even growth) investors to choose ENS over ENB.
It really gets down to whether the percentage growth in ENB year over year multiplied by the MULTIPLIER (1.6) will exceed the COST of owning ENS (about $0.56 per year) if Middlefield is unable to issue shares that are accretive to the NAV.
One of the features in owning ENS is that ENB earnings growth is very predicatble. ENB's management is very forthcoming (and conservative) with their guidance for a very conservative business where virtually 100% regulated with almost 100% certainty of cash flows are guaranteed.
What does all of this mean?
If ENB continues to increase its dividend, which is extremely likely given the conservative nature of its business and its 27 year track record of consecutive dividend increases, the $0.56 shortfall in the cost of owning ENS will decrease by the approximately 50% of the gain in ENB's payout.
In 2021 and again in 2022, ENB only raised its dividend by $0.10 each year which doesn't move the needle much for ENS as 50% of the increase is only $0.05 per year. The reason that the number is only 1/2 is due to the fact that ENS has approximately 2x as many units versus the number of shares of ENB that the fund owns.
If ENS continues to trade at a discount, or at a premium to the NAV that doesn't exceed Middlefields threshold to raise funds that are accretive to the NAV like it did twice in 2021, then ENS shareholders are stuck with having to deal with the $0.56 deterioration of the NAV each year.
While the increase in the ENB dividend in 2021 and 2020 was only $0.10 each year, in 2018 and 2019 ENB increased its dividend by $0.27 and $0.29 respectively. Therefore, over the 2 years, the net payout to ENS shareholders increased $0.28 ($0.27 + $0.29) / 2 = $0.28. All of the increase gets attributed to ENS as the payout to the Prefs remains flat at $0.52 per year.
If Middlefield is unable to raise more funds in ENS due to the fund not trading at a premium that allows for accretive raises, then ENS shareholders will have to wait until ENB raises its dividend by a total of $1.12 in order for the fees associated with owning ENS are covered. If ENB continues its current path of only 3% increases in its annual dividend, then it will take about 10 years for the fees to be covered. If ENB goes back to increasing its dividend at a higher rate, then the timing for the ENS fees to be covered will be less.
ENB has guided that it expects its cash flow from operations to grow at 5% to 7% through 2024. I expect ENB's growth in free cash flow to be at the top end of their guidance or maybe even exceed the range because the incredible good timing of ENB's acquistion of Ingleside and the ownership of the two pipelines that they acquired in the deal. ENB has also guided that they will be focusing their CAPEX on "inline" projects which basically means they will be investing in improvements of the flow capacity of their existing pipelines. ENB has a threshold 20% return on hydrocarbon based investments, so the inline CAPEX provides excellent returns and comes with virtually zero risk of environmentalist interference.
To put it in a nutshell, it is highly likely that ENB is going to continue to experience strong growth which they will self-finance which mitigates risk. ENB has also guided that they are now focusing on paying their shareholders (thats us as ENS shareholders). As such, I expect ENB will increase its dividend faster than it did in 2020 and 2021 going forward. If ENB doesn't increase its dividend at a faster rate, then the company will be utilizing is ever-growing cash flow to finance growth, which should increase the ENB share price. Either way, one can sleep well owning ENS. We just have to know when to duck if Middlefield raises funds in ENS.
I'm a numbers guy, so I will be keeping track of this pretty closely so that I can get out of the way in advance of any potential raises that knock down the share price of ENS.
PileOfShit has a pretty good grip on this stuff from what I can see which makes his posts worth paying attention to.