Don’t pass up the chance to own a monopoly. These businesses face limited competition, possess insane pricing power, and deliver exceptional returns to shareholders.
A rare opportunity
Due to government regulations, the chance to own a monopoly doesn’t come around very often. Yet every so often, the natural dynamics of a specific industry create unique opportunities.
Consider pipelines. There isn’t a better way to ship oil and gas over land. Trucking is dangerous, inefficient, and expensive. Railroads are better but still face similar problems. Pipelines, meanwhile, require very little manpower, ship volumes on a second-by-second basis, and can move at an unparalleled speed.
If an energy company wants to limit risk, lower costs, and get its product to market faster, it will always choose a pipeline. This means that wherever pipelines are built, they’re almost always flooded with demand until capacity is reached. Only when space becomes unavailable will potential customers turn to other methods.
Having a vastly superior product doesn’t make a business a monopoly, however. There also needs to be limited competition. In the case of pipelines, competition is often nonexistent.
Pipelines are incredibly expensive to build. Construction costs can exceed $10 million per mile. Additionally, due to environmental concerns and land acquisition challenges, it can take more than a decade to fully plan, permit, and build.
These hurdles provide a steep, natural barrier for new market entrants. Even if it’s worthwhile to build a competing pipeline near an existing one, it would take a deep-pocketed entrant to tap the opportunity, one that can wait years until its investment is paid off.
This is the stock
Individual pipelines are often connected to a larger network. If you own the entire network, you can offer customers more capabilities while maintaining complete pricing power.
For example, Enbridge owns gas pipelines that stretch continuously from northern British Columbia all the way across to Nova Scotia and down to Florida and Texas. This gives customers an extreme advantage, as they can get their output to dozens of refineries and end-users, maximizing pricing potential. Shipping overseas is also a growing business, and with Enbridge, customers can choose between the Pacific Ocean (shipping to Asia) and the Atlantic Ocean (shipping to Europe).
With Enbridge, customers have unparalleled access and flexibility. In return Enbridge is able to keep a larger cut than nearly any other pipeline operator. Reports surfaced this year that the company was asking customers to commit to 10-year contracts!
This pricing power allows the company to pay a sizable 6.4% dividend. The assets currently in place generate enough cash to support this payout for decades to come.
Additionally, with more influence and capital than any other competitor, Enbridge has the lead for any potential growth projects. It’s already investing around $6 billion per year in new ventures, which management believes will increase cash flow by 5-7% annually. If that’s achieved, the total return for this stock should range between 11% and 13% per year. Combined with Enbridge’s risk-mitigated business model, that’s quite a steal.
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The Motley Fool owns shares of and recommends Enbridge. Fool contributor Ryan Vanzo has no position in any stocks mentioned.