Enbridge's (TSE:ENB) Waning Rates of Return: A Closer Look

Enbridge Inc. (TSE:ENB), a Canadian energy infrastructure company, has been a staple in the investment community for its stable and predictable returns. However, recent years have seen a deceleration in Enbridge's rates of return, raising concerns among investors. This article delves into the factors contributing to this trend and provides insights into the company's future prospects.

Enbridge's return on equity (ROE) and return on assets (ROA) have both trended downward in recent years. In 2019, Enbridge's ROE stood at 15.1%, which declined to 12.3% in 2021. Similarly, the company's ROA decreased from 8.6% in 2019 to 7.2% in 2021. Several factors have contributed to this deceleration.

One of the primary factors is the increased capital expenditure (capex) required for Enbridge's growth initiatives. The company has invested heavily in organic growth projects and strategic acquisitions to expand its asset base. While these investments are expected to generate long-term value, they have temporarily impacted Enbridge's short-term rates of return.

Another factor contributing to the deceleration in Enbridge's rates of return is the regulatory environment. Changes in regulations and infrastructure projects have impacted the company's earnings growth and return on assets. For instance, the Mainline Tolling Agreement in Principle, negotiated in 2021, led to lower incentive tolls for Enbridge, temporarily affecting its earnings.

Enbridge's strategic acquisitions and divestments have also played a role in its rates of return. In 2021, the company announced the sale of its 50% interest in Alliance Pipeline and its 42.7% interest in Aux Sable for $3.1 billion. While this sale generated significant cash proceeds, it also resulted in a one-time gain that boosted Enbridge's earnings in 2021, making year-over-year comparisons challenging.

To mitigate the impact of these factors, Enbridge has focused on maintaining a strong balance sheet and growing its investable free cash flow. The company has also prioritized capital discipline and the return of capital to shareholders through a sustainable and growing dividend. In 2023, Enbridge increased its quarterly dividend by 3.1% to $0.915 per share, reflecting the 29th consecutive annual increase.

In conclusion, Enbridge's decelerating rates of return can be attributed to increased capex, regulatory changes, and strategic acquisitions and divestments. While these factors have temporarily impacted the company's short-term performance, Enbridge's long-term prospects remain strong. The company's focus on maintaining a solid balance sheet, growing free cash flow, and returning capital to shareholders positions it well for future growth and value creation. Investors should monitor Enbridge's progress in these areas as they assess the company's long-term investment potential.