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Why Enbridge Yielding 7.87% Is a Big Mess

When Enbridge (ENB) announced that it would spend $14 billion to buy Dominion Energy’s (D) utilities, shares plunged. This sent ENB’s stock dividend to 7.87% by the end of last week.

Enbridge will increase its debt as it buys three utilities from Dominion, an electric services firm. Enbridge will become the biggest provider of natural gas in the U.S. On CNBC, CEO Greg Ebel said that it adds to the company’s sustainability offering at an affordable price.

Markets reacted badly to the deal because Enbridge already has high debt. It increases its debt leverage with the purchase. In addition, it will pay by selling shares, diluting existing shareholders. Furthermore, risks arise that Enbridge may fail to execute on increasing cash flow from the acquired assets.

That same week, the Bank of Canada said that it would not raise rates. However, it is willing to increase them if inflation is still high and GDP grows. The higher rates will hurt Enbridge when valued on its future discounted cash flow.

Investors who thought Enbridge offered the best yield just got a higher yield on a lower stock price. They will need to hold the stock for longer just to break even.