Enbridge (TSX:ENB)(NYSE:ENB) stock has appreciated about 32% from the low of $37 per share roughly a year ago to $49 per share today. That’s a tremendous move for a large-cap company with a market capitalization of about $99 billion today!
Currently, the stock is near overbought territory and seems to be losing steam to head higher — at least, in the near term.
What will be a big mover for Enbridge stock?
The near-term overhang of Enbridge is the Line 3 replacement project, which is significant because the project is the largest in Enbridge’s history.
The roughly $9-billion project ($5.3 billion for the Canadian component and US$2.9 billion for the U.S. component) is a huge part of Enbridge’s multi-year capital program. Specifically, it’s about a third of its capital program over a three-year period.
As Enbridge’s website states, “The new Line 3 will comprise the newest and most advanced pipeline technology—and provide much needed incremental capacity to support Canadian crude oil production growth, and U.S. and Canadian refinery demand.” The new pipeline “will fully replace 1,660 kilometres of Line 3 with new pipeline and associated facilities on either side of the Canada-U.S. international border.”
The new Line 3 was supposed to come into service this year. Unfortunately, it’s now expected to come into service in the latter half of 2020 instead, because Enbridge expects to receive the final state permits for the project later than originally expected.
With the delay in the new Line 3 project, Enbridge will be generating cash flow from the new pipelines later than sooner. What will be a big mover on the stock is any good news about the Line 3 replacement project — because it’s such a significant project for Enbridge.
An undervalued big dividend stock
While investors wait for that big mover, they can get a very generous dividend from Enbridge. As of writing, the company offers an attractive yield of 6%. This means that investors only require a very modest growth of 4% in the stock to generate long-term average market returns.
Even better, Enbridge believes that it has the ability to increase the dividend by 10% next year and likely to increase the dividend by 5-7% per year after that — in line with its estimated distributable cash flow growth.
Enbridge likes to keep its dividend payout ratio under 65% of distributable cash flow, which keeps its dividend safe. In 2018, the payout ratio of about 61% had an even bigger margin of safety.
Enbridge is actually undervalued today, with a mean 12-month target of $54.20 per share from Thomson Reuters. Moreover, that target will likely increase to the $60 area once the Line 3 replacement project is up and running. These targets represent 10-23% upside potential.
Enbridge’s yield is more than double the yield of the North American markets. Its attractive 6% yield is perfect for income seekers. Additionally, the high-quality, large-cap stock has double-digit upside potential.
We believe that once the Line 3 replacement project — its biggest project in the company’s 70-year history — is up and running, and it could be a big mover for Enbridge stock.
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Fool contributor Kay Ng owns shares of Enbridge. The Motley Fool owns shares of Enbridge. Enbridge is a recommendation of Stock Advisor Canada.