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I’m always curious to know which stocks other dividend growth investors are following and researching. So, I ask people who follow me to choose the stocks they want me to write about. Today, I’m bringing you the latest requested analysis article – Enbridge(ENB) . Keep an eye on my Instagram page to vote and find out which company I’ll look at next in this series.
The Company
Important: A lot of investors make the mistake of analysing midstream companies such as Enbridge using standard GAAP metrics. This gives a distorted view of the financials of those businesses (due to non-cash depreciation/amortisation charges). To find out more about it, check out my Dividend Investing Online Course.
Enbridge(ENB) owns and operates crucial infrastructure assets serving North America’s energy needs. Approximately 25% of North America’s crude oil and around 20% of the natural gas consumed in the U.S. flow through Enbridge’s pipelines.
Apart from its pipeline operations, Enbridge also operates North America’s third-largest gas utility based on consumer count. The company is also expanding its renewable energy assets portfolio, further diversifying its business operations.
At the heart of Enbridge’s success sits a business model characterized by its stability and reliability. An impressive 98% of Enbridge’s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) is either regulated, cost-of-service or contracted. This means cash flows are dependable and predictable, which has allowed Enbridge to be such a good dividend payer (and grower).
Moreover, Enbridge’s partnerships with high-quality businesses further fortify its financial standing. Approximately 95% of the company’s customers are investment-grade rated, reflecting the strength of its business partners.
Dividend
The company boasts a high dividend yield of over 7%, making it an appealing choice for income-focused investors. Importantly, Enbridge has consistently increased its dividend for 28 consecutive years, a testament to its commitment to rewarding its shareholders.
The company’s dividends are well-covered by cash flows. Considering the mid-point of the 2023 DCF (Distributable Cash Flow) guidance, Enbridge’s dividends appear secure and sustainable.
Whilst dividend growth is likely to be lower than historical going forward (low single-digit), the main draw here is the high yield, with growth coming via re-investment of dividends.
Balance Sheet
Due to the capital-heavy nature of the midstream business, Enbridge has made use of a lot of debt to finance its infrastructure projects.
However, the company maintains a debt to EBITDA ratio of 4.5x, at the lower end of its targeted range of 4.5-5x. While Enbridge’s leverage may seem high at first glance, the stability and reliability of its cash flows can support that.
Its strong balance sheet is recognized by S&P, which assigns Enbridge an investment-grade BBB+ credit rating.
Valuation
Fair Value analysis exclusively available for Premium Members here.
Risks
Investing in Enbridge’s stock is not without risks.
Pipeline projects can be subject to political risks as recently seen with a competing pipeline – Keystone. Although opposition to a competing pipeline is a positive for ENB, it can also derail some of ENB’s own future projects.
Pipeline accidents and oil spills are another risk when it comes to Enbridge’s business. Historically, there have been some incidents and going forward any oil spill or environmental damage will likely bring a lot of negative press and potential charges against ENB. That’s a risk of doing business for pipelines.
Enbridge’ renewables investment are diverting capital from their core operations, which I see as having a neutral-to-negative effect on DCF.
The company’s debt could be a concern in a continued rising interest rate environment. Further interest rate hikes could result in higher debt refinancing costs and impact the companies profitability. However, with no significant debt repayments due until 2024, Enbridge seems well-positioned to manage its debt obligations.
Summary
Enbridge is a key piece of the North American energy infrastructure. It generates reliable and predictable cash flows in almost all economic environments and has been able to pay out growing dividends for almost 3 decades as a result. Although higher interest rates can hurt the company’s profitability over the long run, Enbridge remains well-positioned to keep rewarding its shareholders.
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Disclaimer: I’m long ENB.TO
