In the current stock market Enbridge (ENB) is neither fish nor fowl. And since the stock has hit my December 2009 target price of $38 a share, I’m going to sell it out of Jubak’s Picks.
Here’s what I mean by that cryptic neither fish nor fowl characterization.
I bought Enbridge for the Picks portfolio back in December 2007 because I thought its 3.6% yield would make the stock price very stable in a tough stock market and that investors looking for safety would bid up the price of these shares. I got half of what I wished for. The stock was very stable,but I didn’t get any gain in stock price. Enbridge trades today for roughly the same price I paid for it on December 18, 2007.
I am looking at a 6.3% return from the dividends that I collected during the 21 months that I owned the stock. Not terrible but I had hoped for a higher total return package. (By the way, for all those who have asked when I’ll put the dividend portfolio that I ran at MSN Money back up, the answer is Next week. Finally.)
Going forward,though, Enbridge doesn’t have the revenue and earnings recovery story to produce an attractive price gain in a market that is set, over the next eight to 12 months anyway, to believe in and reward recovery. (For my take on the near-term and intermediate term, see my post https://jubakpicks.com/2009/09/30/those-individual-investors-who-left-the-stock-market-in-2008-arent-back-yet-which-will-make-any-near-term-dip-short-and-shallow/ With a yield of 3.6% Enbridge doesn’t pay enough of a dividend to make up for its relatively lackluster prospects for price appreciation.
I think you can find better recovery stories that will earn you a bigger capital gain over the next eight months to a year and I think you can find better yield stories too. (Dividend yield investors should take a look at the Enbridge master limited partnership Enbridge Energy Partners (EEP) with its 8.8% yield.)
 I’m selling Enbridge out of Jubak’s Picks with a return of 6.3% since I added it to the portfolio. (Full disclosure: I own shares of Enbridge Energy Partners in my personal portfolio.)
Edit to my 1 October 2009 post: Sorry, I forgot to state the main point. EEQ and KMR are each organized as a Corporation, not an MLP. They distribute dividends and return of capital, which get you a 1099 at tax time, not a K-1. They were formed to enable pension funds and IRA investors to invest in MLPs. Each of these two represent about 15% of the shares outstanding in their respective partnerships. They get the same distributions per share as EEP and KMP, but since their stock price tends to run lower they earn you a slightly higher effective yield.
MLPs in IRAs: Couple of choices for not having to deal with K-1 issues of “unrelated business taxable income.” EEQ is the Enbridge equivalent of KMR. Note that the effective yields for KMR and EEQ are higher than their respective EEP and KMP, reason most likely being that the dividend is paid in shares not cash. Also, closed end funds (you get a 1099 not a k-1) such as TYY and KYN focus on the midsteam MLPs. These “stocks” work in IRAs. The latter two are trading at a premium to NAV right now, but the yields are still high. Like all MLP oriented investments, their risk includes credit type risks because they must borrow to expand. This credit issue is one of the reasons they sold off so much in November. Hedge funds play here also because they can leverage these yields, so they will be volatile.
I confused ETP and ETE (the senior partner) in my last post. Please ignore the comparison.
ETP just priced a 6 million common unit offering at $41.27 per unit with an option for 900,000 more units. The existing units were just trading at around $27.66. I would interpret that as a strong market signal that somebody thinks the existing units are underpriced.
The deal with MLP’s in an IRA is that they can at times produce taxable income within an IRA. This is only if you have $1000 or more of “unrelated business taxable income”. From my web searches, it SEEMS that this is normally a very low % of the dividends you get; however, the longer you hold the partnership units, the larger this can become.
Ultimately, you can buy enough shares so that at, say, 10%, you will not produce $1000/year.
There is a lot of misinformation out there. If you do have more than $1000 in “unrelated business taxable income”, you only have to pay tax on that from within the IRA. This is doable, but you may want some hand-holding.
These MLPs have a lot of debt, if credit doesnt thaw out and NG prices dont firm up, there is a lot of risk there to div and companies. they all have great expansion plans too sucking up cash. sold EEP before 9/08 mess at 52, have not looked back it is still lower.
I have MLPs in my Roth account.
Dan1to, KMR is safe for a roth account. It pays in shares an equal rate to the dividend for KMP. CVX has a nice yield of 3.75 and decent growth prospects. Good Luck in the oil patch.
Roth accounts cant use M.L.P.’s due to tax reasons…at least mine cant. Do you see any longer-term, solid, higher-end dividend paying oil and gas companies that are interesting besides ENB, STO, XOM, or maybe TRP?
dan1to, that is indeed what I’m saying. I just don’t find the value proposition or the income from ENB atrractive in the 12-18 month time period. I’m going to keep OKS and ETP in the portfolio because they’re yields are significantloy higher than ENB’s. With the Fed putting off the day it raises interest rates every time it opens it’s mouth I’m going to keep on holding these.
Just in case, Enbridge is still in Jubak’s 50 Best portfolio. I believe the sell here is for the 12-18 month time horizon. It seems Jim does not find Enbridge to be the most profitable stock to own, but it is still a long term one we should consider. (At least I believe that’s what he is saying?)
cool, I do remember him saying that. Thanks kingtrenchard
I would think that all things being equal OKS and ETP would still be holds as they are MLPs like EEP. ETP’s divided is still around 7.7 with good growth opportunities. I believe Jim has stated he wants to hold these at least until he sees the Fed start raising rates. If natural gas demand picks up with increased economic activity we could see an earnings recovery in both of these stocks in addition to the quarterly distributions.
Ditto that question
Hi Jim, should we also be looking at selling OKS and ETP?