Enbridge (TSX: ENB)(NYSE: ENB) is up 17% in 2019, and investors who missed the rally are wondering if the recovery is just a head fake or the start of an extended move to the upside.
Let’s take a look at the current situation to see if the energy infrastructure giant deserves to be on your buy list right now.
Turnaround
It’s amazing how quickly sentiment can change in the equity markets. Last year, investors wanted nothing to do with go-to dividend stocks such as Enbridge amid concerns that rising interest rates would result in a flight of capital from these names in favour of no-risk alternatives.
As we now know, the Bank of Canada and the U.S. Federal Reserve have decided to put their rate-hike programs on hold, and some analysts are speculating the next moves could be cuts. The mood swing is having an impact on the equity markets, as investors shift back to top dividend plays that were arguably oversold.
Enbridge is also picking up support from investors who like what they see on the company’s turnaround efforts. Enbridge has decided to focus its investment and strategy on growing its portfolio of regulated businesses. In the wake of the $37 billion Spectra Energy acquisition, management identified $10 billion in non-core assets that could be monetized. In 2018, Enbridge found buyers for about $8 billion of that amount. The proceeds are earmarked for debt reduction and to help fund ongoing developments, including the Line 3 replacement project.
Enbridge made life easier for analysts last year by bringing four of its “sponsored vehicle” subsidiaries under one roof. The streamlined structure takes some of the difficulty out of evaluating the stock.
Dividends
Enbridge has a strong track record of dividend growth. The company raised the payout by 10% for 2019 and is expected to increase it by a similar amount in 2020. Beyond that time frame, Enbridge is targeting growth in distributable cash flow in the range of 5-7% per year. Investors should see the dividend increase at a similar rate.
The current payout provides a yield of 5.9%.
Should you buy?
Investors who had the foresight to buy Enbridge below $40 per share last year are already sitting on some nice gains, but those who step in today at $50 could also do well over the next couple of years, especially if the Line 3 project goes into service by the end of 2020 and interest rates stay at current levels.
If you have some cash on the sidelines, Enbridge offers a very attractive yield and a shot at additional gains. This was a $65 stock at one point in 2015, so 30% upside is possible.
