During the 2008 and 2009 financial crisis, shares remained flat while markets around the world dipped by 30% to 60%. When factoring in dividends, Enbridge investors actually earned money during one of the most volatile periods in stock market history.
Fast forward to 2014 when oil prices dropped by more than 50%. Energy stocks were crushed. Several notable competitors went bankrupt. Meanwhile, Enbridge investors did quite well, earning an average 5% annual return from 2014 through 2016.
That’s not a huge return, but it sure beats a gigantic loss.
Over the last five years, Enbridge stock has lagged the market, at least when it comes to its share price. This has been a rare period of underperformance.
Should you trust the company’s impeccable history and scoop up discounted shares? Or, has this stock already run its course?
Bet on this dividend
Last year, Enbridge raised its dividend by 10%, resulting in a yield of 6.4%. Despite this high yield, management anticipates growing the payout by 10% per year through 2020.
Judging by its history, it’s a good bet that this growth will materialize.
Since 1998, the dividend has grown by an average of 11.9% per year. The payout has never been cut. In fact, it’s experienced more than 20 years of consecutive increases, one of the longest stretches in Canadian stock market history.
Even more impressive, the payout ratio is below 65%, meaning the company still retains more than one-third of its earnings. That’s an impressive cushion.
Looking ahead, there’s reason to believe the dividend can grow for many years beyond 2020. Thanks to a $7 billion capital growth program, critical infrastructure is being established to support decades of growth. Enbridge should bring on at least $3 billion worth of new projects online this year.
With record throughput on its existing pipeline infrastructure, as well as several mega-projects hitting the books in 2019 and 2020, this is a dividend you can continue to trust.
Downside is limited
Investing in the energy sector can be nauseating, but Enbridge has an ace up its sleeve.
Because operating pipelines is largely based on volumes, Enbridge is less exposed to swings in commodity prices. Roughly 98% of the business is regulated or fixed-fee, so as energy prices move, the firm’s profit remains stable.
When it comes to volumes, the future is looking very bright. Looking ahead, the EIA expects U.S. and Canadian production to hit record highs, rising annually until at least 2030.
Enbridge is already positioned to profit from the increased need for its services. Last year, Enbridge moved 25% of North America’s crude oil. It also moved around 20% of the continent’s natural gas.
So, if volumes surge, Enbridge wins. Right now, everything is suggesting that this will be the case.
What are the odds that volumes fall? Extremely low.
Oil sands in Canada are some of the most expensive projects on the planet. Breakeven levels for big players like Canadian Natural Resources Ltd, Husky Energy Inc., and Suncor Energy Inc. are between US$40 and US$50 per barrel. The respective management teams expect these figures to fall over the coming years.
All this means that unless oil prices fall below US$40 per barrel for an extended period, volumes should be expected to rise over the coming decade, greatly benefiting Enbridge.
With a reasonable valuation, high and healthy dividend, ample growth opportunities, and limited downside, Enbridge is certainly still a buy today.