Enbridge Inc. (ENB) is a leading North American energy infrastructure company whose core business includes operating liquid pipelines, which transport approximately 25% of the crude oil produced in North America. In addition, the company’s gas transmission and midstream division transport about 20% of the natural gas consumed in the United States, annually.
Enbridge is also a big player in gas distribution and storage space. The company serves around 75% of Ontario residents via approximately 3.8 million meter connections. Finally, Enbridge’s renewable power generation segment has a capacity of 1,750 megawatts (MW) of net renewable power in North America and Europe. The Canadian-based company trades both on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE).
In my view, Enbridge remains very reasonably valued despite the energy sector recovering notably over the past year. The stock also offers a tremendous yield of 6.49%, with dividend increases likely to continue, going forward. For this reason, I believe Enbridge makes for a great pick for-income oriented investors. I am bullish on the stock.
Enbridge’s Q3-2021 results came in rather strong, with adjusted EBITDA growing by 10% year-over-year, to CAD$3.3 billion. Adjusted EBITDA growth was powered mostly by stronger performance from the company’s liquids pipelines segment.
Distributable cash flows came in at CAD$2.3 billion (US$1.84 billion), or
U.S.$0.90 on a per-share basis, also growing by 10% vs. the comparable period last year in constant currency. The company is projecting distributable cash flows to land between CAD$4.70-5.00 in FY-2021. This translates to around USD$3.80 at the midpoint of management’s guidance at the current FX rates, suggesting growth of around 3.2% compared to last year. It will also mark a new DCF/share record for the company.
Enbridge also expected its adjusted EBITDA to be around CAD$14.1
billion in FY-2021, which currently translates to US$11.03 billion and implies a 5% growth compared to FY2020.
Enbridge’s Legendary Dividend
Enbridge showcases a best-in-class dividend growth record. The company has hiked its distributions annually for the past 27 years with no exception, even during harsh times for the energy sector, such as during 2007-2008, or even more recently, during the ongoing COVID-19 pandemic. The company would qualify to enter the Dividend Aristocrats Index. However, this is not the case, due to it being a Canadian company.
Enbridge’s dividend growth has also occurred at a swift pace. Over the past 27 years, Enbridge’s dividend has grown at an average compound annual growth rate of 10%. Moreover, earlier in December, the company announced a 3% increase to its dividend per share, increasing the quarterly dividend to $0.860.
While this shows deceleration in dividend growth, in my view, this is a prudent move from management while uncertainty over COVID-19 still looms. Dividend growth is likely to re-accelerate once again in the medium term. Moreover, based on the company’s distributable cash flows, the payout ratio seems quite comfortable, hovering at around 70%. Hence, investors can feel secure that the company’s substantial yield of 7% is well-covered while knowing that there is enough room for growth in Enbridge’s upcoming dividends.
Assuming Enbdrige DCF/share of around $3.80, the stock is trading at a P/DCF of around 10.2, which I also find quite attractive for such a quality company. Further, the 6.49% yield provides investors with a substantial margin of safety.
Wall Street’s Take
Turning to Wall Street, Enbridge has a Moderate Buy consensus rating, based on ten Buys and four Holds assigned in the past three months. At $43.94, the average analyst ENB price target implies 12.4% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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