2023-03-22 14:00:00 ET
Summary
- "You can learn a lot about how well they run the business by seeing how they have allocated capital over time" - Warren Buffett.
- We adopt Mr. Buffett's evaluation methods to our needs by seeking businesses prioritizing shareholder returns.
- Two bear market bargains with up to 12% yields for the long-term investor.
Co-produced with "Hidden Opportunities."
Market selloffs repeatedly rattle the investor community. Investors aggressively try to sell their holdings to collect whatever they can get (while they can still get it), and years later, they regret not buying more. Even investors with decades of experience tend to make the same mistakes as beginners because they have limited command over their emotions.
No matter how many bear markets you have been through, you will not be a successful investor unless you gain control over your fears and emotions. Warren Buffett has demonstrated successful rinse and repeat of simple principles. He has pursued his techniques without fearing market corrections, bear markets, and meltdowns. While it's common for investors' emotions to bait them into poor decision-making during market downturns, Buffett chooses to be greedy when others are fearful.
"Keep buying through thick and thin, and especially through thin. The temptation when you see bad headlines in newspapers is to say, 'Well, maybe I should skip a year or something.' Just keep buying. American business is going to do fine over time, so you know the investment universe is going to do very well." - Warren Buffett.
Among several simple-to-adopt criteria, the Oracle of Omaha seeks companies run by capable management teams with a solid track record and continued alignment to create shareholder value. We discuss two such picks that heavily prioritize returns to shareholders.
Let's dive in!
Pick #1: ENB - Yield 7%
Enbridge Inc. ( ENB ) operates the world's longest and most complex crude oil and liquids transportation system, with about 17,809 miles of active pipeline. The midstream company moves approximately 30% of the crude oil produced in North America and transports ~20% of the natural gas consumed in the U.S. through its vast network of pipelines and storage terminals. ENB also operates North America's third-largest natural gas utility by consumer count. Source .
Enbridge Q4 2022 Investor Presentation
ENB is North America's largest midstream company by market cap. This Canadian blue-chip company is an excellent dividend steward, with 68 years of dividend payments to shareholders. The company's Q1 2023 dividend reflected a 3.2% raise from the previous year and marked the 28th consecutive annual raise. The company's C$3.55/share calculates to a 7.0% annualized yield.
Enbridge projects FY 2023 - Distributable Cash Flow ('DCF') of C$5.25 - C$5.65. This calculates to a 62-67% DCF payout ratio.
In FY 2022, ENB reported Adj. EBITDA of C$15.5 billion and paid C$7 billion on common dividends. For FY 2023, the company projects adjusted EBITDA of C$15.9-16.5 billion will provide a healthy 2.2x coverage for the C$7.25 billion. (The FY 2023 common dividend spend is calculated by increasing FY 2022 figure by 3.2% and assumes the company does not pursue any buybacks).
Note:
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ENB declares and pays dividends in Canadian Dollars. The amount received by U.S. investors is variable due to changes in USD-CAD rates.
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ENB is a Canadian dividend aristocrat with no dividend withholding if held in a U.S. retirement account such as IRA.
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ENB is a Canadian C-Corp that is listed on NYSE and Toronto Stock Exchange. ENB issues a 1099 for tax purposes.
98% of ENB's revenue is derived from long-term take-or-pay and cost-of-service contracts, and 95% of ENB's customer base is investment-grade. Additionally, 80% of the company's EBITDA has inflation protections (65% from assets with revenue inflators and 15% from assets with regulatory mechanisms to recover rising costs). This means ENB is in an excellent position to maintain the top line through volatile economic conditions and protect its profitability (bottom line) through inflation pressures.
ENB maintains an investment-grade BBB+ rated balance sheet with debt to EBITDA 4.7x. 90% of the company's debt is at fixed rates, with a weighted average interest rate on outstanding commercial paper of 4.5% as of December 31, 2022. Its interest expenses (C$ 3.2 billion in 2022) were adequately covered by the company's net cash from operating activities (C$11.23 billion). ENB is targeting a 4.5-5x leverage ratio at the end of FY 2023.
ENB has significant projects underway to expand its cash-producing asset base. The company has a C$18 billion (of which C$5 billion has already been spent) total secured capital program to bring several projects into operation in the next five years. Several will begin generating revenue in the next 12-18 months.
Enbridge Q4 2022 Investor Presentation
ENB's C$5-6 billion annual investment capacity allows the company to self-finance these projects.
Going forward, we have ample investment capacity for more organic growth, tuck-in M&A, debt repayment and share buybacks. - Vern Yu, EVP & CFO, Enbridge Q4 conference call .
Are you concerned about the looming recession fears? In ENB, we see a low-risk 7% yielding midstream company with adequate top and bottom line protections backed by a strong balance sheet.
Pick #2: PAXS - Yield 12.6%
PIMCO Access Income Fund ( PAXS ) is a Closed-End Fund ("CEF") that just completed its first year on the public markets. This CEF was born just before the Fed began raising interest rates and is structurally designed to benefit from this hawkish policy landscape.
In other words, if the Fed will maintain these higher interest rates for longer, PAXS is well-positioned for it. The bulk of PAXS's portfolio is short-term debt securities that can be redeemed at face value and redeployed to generate higher yields. Source .
PAXS Website
Note: PAXS is similar to PDO, but PDO has a better composition of short-term debt instruments. For investors with adequate allocation to PDO (and other PIMCO CEFs in the HDO model portfolio), PAXS presents an attractive alternative for its solid income prospects.
PAXS trades at a ~8% discount and presents an attractive opportunity to build income in this bear market. The CEF has been an income investor's best friend in the past year, with a 28% monthly distribution raise in September and a large special distribution (almost 3.5x a regular monthly payment) in December. This CEF has much more potential as the monetary policy remains hawkish.
Notably, PAXS maintains about 45% leverage, putting it on the higher side among comparable CEFs from PIMCO. PAXS pays $0.1494/share monthly, a healthy 12.6% annualized yield. This distribution is adequately covered by the fund's estimated Net Investment Income from PIMCO's January UNII report, with 102% YTD coverage (PIMCO CEFs Fiscal Year began July 1, 2022). Data Source: PIMCO UNII Report, January 2023.
Since PAXS's inception, we have seen the fastest tightening pace since the 1980s. Along with this, investors' income has soared in a repeatable and sustainable manner. As portfolio instruments mature, PAXS's portfolio composition will have higher yields, presenting distribution growth prospects (or attractive special distributions) for shareholders.
PIMCO has 40+ years of experience with fixed-income securities and a proven track record of producing current income for shareholders through varying market conditions. PAXS is an excellent +12% yielding gem from PIMCO to accumulate in this fearful market.
Conclusion
No one likes to get rich slowly. This is why there aren't many Warren Buffett's in the world. Building sustainable wealth is generally a long, slow process. Some investors get impatient and try to game the process by swinging for the fences with meme stocks. We can learn much from Mr. Buffett's decades of investing experience and are looking to apply some of those principles in our decision-making.
As a buyer of businesses, Mr. Buffett seeks top-notch management. This makes sure he and his team don't have to micromanage the target company after it has been integrated with Berkshire Hathaway. We have a similar expectation from our investments - we want to avoid being glued to the news or having sleepless nights. Looking for more picks like this? At "High Dividend Opportunities," our aim is to own "Buffett-Like" stocks that offer high yields. Currently, our "model portfolio" consists of +40 securities with an overall yield of +9% with the objective of achieving recurrent income for our retirement.
Enbridge, with almost seven decades of dividend stewardship, and PIMCO with four decades of fixed income expertise, present investments where the mission and vision are aligned with the interests of shareholders. With these in your portfolio, you can lock in up to 12% yields and sit patiently for the fears to subside.
For further details see:
Warren Buffett's Secret For A Rich Retirement