Enbridge (NYSE:ENB) It’s not an exciting company, but that’s actually one of the biggest draws here. And the dividend yield is very high at around 7.4%. But to really understand why you’ll be happy to buy this stock in a few years, you have to dig deeper into the business and how it returns value to investors over time.
Enbridge is more than just a midstream giant.
The energy sector is known for being volatile, but not all companies in the industry deserve that label. Upstream (drilling) and downstream (refining and chemicals) businesses are often very volatile, but midstream businesses like Enbridge are usually not. This is because midstream companies own the energy infrastructure (Like a pipeline) connects upstream, downstream, and the rest of the world, and primarily charges fees for the use of its assets.
Enbridge is basically a toll collector. And because oil and natural gas are essential to the smooth functioning of the world, demand is energy The price is weak. Oil pipelines account for about 50% of earnings before interest, taxes, depreciation and amortization (EBITDA), while natural gas pipelines account for about 25%. Here’s where the next interesting thing about Enbridge comes in.
The energy giant’s remaining business comes from regulated natural gas utilities (22% of EBITDA) and renewable energy investments (3%). Natural gas burns cleaner than coal or oil and is considered a transition fuel. Enbridge recently agreed to acquire three natural gas utilities. Dominion EnergyIt has increased its exposure to this energy niche from 12% to over 22%. Regulated utility assets gain exclusivity in the areas they serve in exchange for government approval of rates and investment plans. This tends to lead to slow, steady growth over time. Simply put, Enbridge’s business is more reliable because of this investment.
And there’s a renewable energy business that’s fairly small compared to the rest of the company. But clean energy is still a relatively small part of the global energy pie. The fact that Enbridge is expanding into this area is basically an attempt to use its carbon fuel revenues to change with the world as clean energy becomes more important over time. It’s a hedge of sorts for investors who aren’t ready to jump into renewable energy but recognize that renewable energy is playing a growing role in the world.
What can investors expect from Enbridge?
So Enbridge is a boring midstream company that is slowly turning its business around in a cleaner direction. That’s not a particularly interesting story until you consider its whopping 7.4% dividend yield. Most investors expect the stock market as a whole to return about 10% a year, so Enbridge’s dividend alone would give you about three-quarters of that.
Meanwhile, the dividend is supported by an investment grade balance sheet. And the payout ratio for distributable cash flow is right in the middle of management’s target range of 60%-70%. The dividend has also increased every year for 29 consecutive years. This is a reliable dividend stock, and there is no reason to believe that the dividend is in danger. In fact, it seems very likely that slow and steady dividend growth in the low single digits is a reasonable expectation.
So if the dividend grows at about 3%, roughly in line with inflation, the total return investors can expect is probably around 10%. That’s adding the current 7%+ yield to the dividend growth rate of about 3%. Since stocks generally grow with their dividends over time to keep their yields constant, it’s not unrealistic to expect market-level returns from these high-yield stocks. It’s hard to complain, especially since reinvesting the dividends can compound over time.
Enbridge’s base case is good
It seems likely that Enbridge will be able to continue what it is doing. As mentioned above, that alone should be enough to provide solid returns to investors. But what’s interesting here is that Enbridge’s dividend yield is historically high today. So it actually appears to be trading at a depressed price.
It is entirely possible that this situation has not changed and yields have simply risen to a new range that reflects Enbridge’s current business. However, if Wall Street suddenly becomes more interested in the company, investors who buy today will be energized by increased demand for the stock. The base case is that Enbridge’s boring business is generating roughly market-level yields while the upside potential is much higher. It seems like an attractive risk/reward balance that you will regret missing out on if you don’t jump in soon.
Should I invest $1,000 in Enbridge right now?
Before buying Enbridge stock, consider the following:
that much Motley Fool Stock Advisor The analyst team just confirmed what they believed. Top 10 Stocks Investors should buy now… and Enbridge wasn’t one of them. The 10 stocks that made the cut could deliver huge returns in the coming years.
When do you consider it? Nvidia We compiled this list on April 15, 2005… If you had invested $1,000 at the time of our recommendations, You will have $722,626!*
stock advisor It provides investors with an easy-to-follow blueprint for success, including guidance on portfolio construction, regular analyst updates, and two new stock recommendations each month. stock advisor There is a service Increased by more than 4 times The recovery of the S&P 500 since 2002*.
*Stock Advisor returns returns as of July 15, 2024.
Reuben Gregg Brewer We have positions in Dominion Energy and Enbridge. The Motley Fool has positions in Enbridge and recommends it. The Motley Fool recommends Dominion Energy. The Motley Fool has positions in Enbridge and recommends it. Public Policy.
Years from now, you’ll wish you had bought these undervalued, high-yield stocks. Originally published by The Motley Fool.
