Enbridge
Enbridge Inc. (NYSE:ENB) is a large Canadian energy company that has investments in energy infrastructure. It is one of the blue chips in this space with a BBB+ credit rating. ENB has investments in pipelines, utilities, renewable energy, energy services, and storage facilities. Its investments are not just in Canada but also in the USA. It is a "dividend aristocrat" with dividend increases every year for more than 25 years. That's why it is surprising that they offer such attractive high-yielding preferred stocks.
While ENB is one of the most written about companies on Seeking Alpha, with most writers taking a bullish stance on the company, it seems that there is almost no coverage of the ENB preferred stocks which are clearly great values. You get yields on the preferred stock that are greater than the common stock but with more safety.
Reset Rate Preferred Stocks
Reset rate preferred stocks are becoming more popular in the U.S. but it is Canadian companies that have really issued a lot of these. In the U.S., a reset-rate preferred stock's dividend is generally tied to the 5-year treasury note. Every 5 years, if not called before then, the dividend is reset to the current 5-year treasury note yield plus some fixed amount. Once the dividend is reset, the dividend becomes fixed for 5 years before it is again reset based on the same formula.
Canadian reset-rate preferred stocks are similar except they are tied to the Canadian 5-year government note. And one benefit that Canadian reset-rate preferred stocks have over their many of their U.S. counterparts is that once they reset they can't be called for 5 years until the next reset date has arrived.
The benefit of reset-rate preferred stocks is that it protects you against higher interest rates. While fixed-rate preferred stocks can see their prices tumble when interest rates go higher, reset-rate preferred stockholders can look forward to seeing their yield reset higher when the dividend resets and thus have protection against higher rates.
Enbridge Preferred Stocks
This is a follow-up article. I originally wrote a bullish article about Enbridge preferred stocks in October of 2023. I wrote on ENB.PR.P and ENB.PF.V (U.S. OTC ticker EBGEF). These 2 preferred stocks were set to reset at higher yields and I felt strongly that we would be able to generate strong total returns with most of it coming from capital gains as the reset date approached. Well both have now had their dividends reset for 5 years.
We recommended EBGEF (ENB.PF.V) to our members at $19.02 on September 9th and sold our position at $21.20 just 1 month later as investors woke up to the fact that the dividend was going to rise significantly when it reset. This generated a 144% annualized return. And it is even higher now at $21.80. We use annualized return because we are not buy and hold investors but rather we buy undervalued high dividend securities and make most of our returns via capital gains; selling our positions when they are no longer as undervalued as when we recommended them and recycling that money into what is most currently undervalued now. Rinse and repeat.
And we recommended ENB.PR.P to our subscribers at $15.98 CAD and now it currently trades at $18.25 CAD. We sold half of our position on February 9th for a 40% annualized return. The price of the public article was $16.54 but we always make our recommendations to our members first and only after some time might we put out a public article.
So here are my favorite ideas now regarding ENB preferred stocks.
ENB.PR.Y
ENB.PR.Y is a Canadian reset-rate preferred stock from Enbridge. It should be announcing its reset rate in around 4 months and the new dividend will take effect on 9/1/2024. With the Canadian government's 5-year note currently yielding 3.632%, ENB.PR.Y is set to have its yield jump to 8.80% for the next 5 years. This assumes a price of $17.20 Canadian for ENB.PR.Y. This is an extraordinarily high yield for a BBB- rated preferred stock that pays a "qualified" dividend. Despite the fact that Canadian interest rates are lower than in the U.S., the yield here blows away all BBB- U.S. preferred stocks. The reset formula for ENB.PR.Y is the yield on the Canadian 5-year note plus 2.38% at par. But of course, the current price is way below par at $17.20 giving us a very high yield.
Here is a list of all U.S. BBB- rated preferred stocks that pay qualified dividends, trade below par, and also have at least a Ba1 rating from Moody's.
As you can see from the rightmost column of the above chart, there is nothing that comes close to the current 8.80% reset yield of ENB.PR.Y. The best is 5.92% from MS-K and it trades at close to par so little upside relative to ENB.PR.Y which trades at $17.20 with lots of potential in terms of capital gains.
And there is no need to worry about what the Canadian 5-year note yield will do between now and the reset announcement in 4 months. With the reset yield on ENB.PR.Y being 5.17% higher than the Canadian 5-year note, no matter where the Canadian 5-year note yield is in 4 months, I expect ENB.PR.Y to move higher as it is grossly undervalued. Anyone who is a serious fixed-income investor understands that a 5.17% spread over treasuries from an investment-grade security is incredibly good. There is nothing even close to this in U.S. preferred stocks. So as ENB.PR.Y gets closer to its reset date, investors will take notice of the coming huge jump in yield from the now 5.48% to 8.8% and should bid this security higher. This is exactly the setup we had for the 2 very successful trades I mentioned above - EBGEF and ENB.PR.P. Fortunately for us, and unfortunately for many investors, many investors focus on current yield and are missing the story here giving us this opportunity.
The next ticker that we will discuss trades in the U.S. and in U.S. dollars. But first you need to understand that ticker ENB.PR.Y is a Toronto Stock Exchange ticker. Unfortunately, most U.S. brokers don't support these tickers, but Canadian brokers, Interactive Brokers, and Fidelity are among those that do support Canadian ticker symbols. I believe that the ticker at Fidelity is ENB_PR_Y:CA and you must enable international trading at Fidelity to place your orders. Understand that ENB.PR.Y is priced in Canadian dollars and pays dividends in Canadian dollars. There is also a 15% withholding on the dividends for U.S. investors but you can get that back at tax time by filing form 1116 (Foreign Tax Credit) which I do every year and is not a difficult form. But my next pick can be bought at most U.S. brokers and is denominated in U.S. dollars with dividends in U.S. dollars.
EBBNF (US OTC Ticker) or ENB.PF.U (on the Toronto Exchange)
Ticker EBBNF and ENB.PF.U are tickers for the same preferred stock. Ticker EBBNF should be available at almost all U.S. brokers and is fairly liquid. It pretty much follows ENB.PF.U in price which is the ticker for those who want/can buy this security on the Toronto Exchange. At Interactive Brokers, they don't support EBBNF so you must use the symbol ENB.PF.U.
To repeat what I said a couple of paragraphs ago, EBBNF/ENB.PF.U trade in U.S. dollars and pay dividends in U.S. dollars. Getting Canadian reset-rate preferreds that trade in U.S. dollars is rare but ENB has 3 of them. And despite them being U.S. dollar preferred stocks, they still provide a huge yield edge versus other U.S. BBB- rated "qualified" dividend-paying preferred stocks.
The reset formula for EBBNF is the U.S. 5-year treasury note plus 3.15% at par. At its last reset, that worked out to a dividend of $1.465. At its current price of $19.60, that is a 7.18% yield which is still way above the best-yielding BBB- rated MS-K which yields 5.92% and EBBNF has much more price upside potential.
But what makes EBBNF super attractive is its future reset rate. At its current price and with the U.S. 5-year note at 4.354%, it will reset at a 9.20% yield. Again, that is a huge spread of the U.S. 5-year note for an investment-grade security which is why I expect it to move up in price over time as we get nearer and nearer to its reset date which is 9/1/2027. Thus I expect a total return quite a bit better than the current 7.18% yield.
Let's compare EBBNF to EBGEF which we previously recommended in the article referenced above. Both are U.S. denominated preferred stocks. Here are the reset rate formulas for each.
EBBNF (ENB.PF.U) - U.S 5-Year Note Plus 3.15%.
EBGEF (ENB.PF.V) - U.S. 5-Year Note Plus 2.82%.
As you can see, EBBNF has the superior reset-rate formula. At current interest rates and prices, EBBNF will reset to a 9.20% yield while EBGEF will reset to only an 8.31% yield. Yet superior EBBNF trades at a price that is $1.20 lower than EBGEF ($20.60 versus $21.80). So EBBNF looks very undervalued relative to EBGEF. So why is that? Again, as we see so often with reset-rate preferred stocks, baby bonds, and term preferred stocks, dividend investors are overly focused on current yield rather than total return and are often mispricing securities and underperforming the market.
Currently, EBGEF has a current yield of 7.75% while EBBNF has a current yield of 7.18%. But what does that really mean when buying securities whose rates will reset? Let's do some relatively simple math.
If you buy $21.80 worth of EBGEF you will earn $1.67 per year. If you buy $21.80 worth of EBBNF you will earn $1.55 per year. So you are getting 12 cents per year more with EBGEF until EBBNF resets on 9/1/2027. That is a total of $0.41 between now and the reset date on EBBNF. So you are paying $1.20 more for EBGEF in order to capture 41 cents of extra dividends. Not the smartest move, especially when EBBNF is the better security with a higher reset rate. So I would say that relative to EBGEF, EBBNF should be selling for at least the same price as EBGEF which is $1.20 higher than EBBNF's current price. If anyone still owns EBGEF from our recommendations some months ago, you definitely want to swap out of EBGEF and buy EBBNF.
Preferred stocks are perpetual and you must value them on what they will return over a very long period and not simply on what they are currently yielding at this moment.
EBBNF has a possibility of being called on its 9/1/2027 reset date at $25 for a 13.20% yield to call (YTC). EBGEF has only a 10.55% YTC and is less likely to be called given its lower reset rate formula.
The 13.20% YTC on EBBNF is an actual possibility given that at current interest rates, it would be yielding 7.5% at a $25 price which is way above the average yield on BBB- preferred stocks as the above chart showed.
Conclusion
We do a lot of work with Canadian reset-rate preferred stocks as they are far and away better than almost any U.S. preferred stocks in terms of yield. In addition to yield, they are less likely than fixed rate preferred stocks to fall in price in a higher rate environment. This is because their dividends will reset higher in a higher rate environment offsetting the negative impact of higher rates.
Although there are many undervalued Canadian preferred stocks, we focused this article on 2 that we think investors ought to really consider for their portfolios.
Ticker ENB.PR.Y trades in Canadian dollars and pays out dividends in Canadian dollars and may not be available at some of the U.S. brokerage firms. But if you can buy it, its dividend is set to reset much higher on 9/1/2024 and investors seem not to be paying attention to this. Using the current Canadian 5-year note yield to calculate the reset rate, the yield on ENB.PR.Y will jump from 5.48% to 8.8% in less than 5 months and this yield is "qualified" for a lower tax rate providing us with a huge after-tax yield. U.S. preferred stocks with the same BBB- credit rating yield around 5.5% which highlights just how good this 8.8% yield will be. Thus, we expect a sizeable rise in the price for ENB.PR.Y as the reset rate gets closer and investors start to take notice. We have made these types of trades before and have generated very large total returns.
Ticker EBBNF (ENB.PF.U on the Toronto Exchange) is a U.S. dollar-denominated preferred stock so you buy it with U.S. dollars and dividends are paid in U.S. dollars. Everyone should be able to buy this preferred stock using either ticker EBBNF (at U.S. brokers except Interactive Brokers) or ENB.PF.U at brokers that support Canadian tickers and that includes Interactive Brokers.
The current yield of 7.18% is still way higher than the typical 5.5% yield on U.S. BBB- rated preferred stocks but the kicker is that at current rates it is set to see its yield jump to 9.20%. Although the dividend will not reset until 9/1/2027, I expect a sizeable move higher in price for EBBNF over time, so when the capital gain is added to the nice current yield, I expect a very nice total return. EBBNF could even be called on its reset date providing a 13.2% annualized yield to call.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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