3 Reasons Enbridge (TSX:ENB) Stock Is the Ultimate Contrarian Bet

A steady dividend yield and low valuation make Enbridge Inc. (TSX:ENB)(NYSE:ENB) stock a worthy contrarian bet for 2020.

| More on:
Going against the grain

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Canada’s oil and gas sector has lost favour since the market crashed in 2014. Major energy stocks have lost tremendous value over the past five years, and there seems to be no end in sight for this pain. However, unloved markets like these are the perfect hunting ground for contrarian investors looking for a bargain. 

In my opinion, Calgary-based energy transportation giant Enbridge (TSX:ENB)(NYSE:ENB) is the ultimate play here. Here are three reasons why. 

A solution seems inevitable

The proposed Trans Mountain pipeline expansion faced new legal challenges this week. It’s another hurdle for an industry that has been struggling for far too long. However, it now seems like there might finally be light at the end of the tunnel. Amendments to Bill C-69 and the Trudeau administration’s takeover of the key project signal genuine progress. 

The Trans Mountain team is expected to get construction started before Christmas and could be done by 2022. Fellow Fool contributor David Jagielski believes progress on this pipeline is an excellent catalyst for energy distributors like Enbridge and could send the stock higher next year.   

However, even if progress on this controversial pipeline stalls again, there are plenty of other reasons to consider adding Enbridge stock to your portfolio. 

Sturdy dividend

The plunge in the stock price has pushed Enbridge’s dividend yield higher. The stock now offers a 6.34% dividend yield. 

While the payout ratio is nearly 100%, the company seems to generate enough cash flow to sustain this dividend going forward. Over the past 12 months, the firm generated $9.9 billion in operating cash flow and paid $5.8 billion in dividends. In other words, cash flow was nearly 70% higher than dividends. 

If business improves next year and the balance sheet strengthens, investors can expect a boost to this dividend. Some experts believe the dividend could be expanded by as much as 10% over the next two years

In fact, the stock is a Canadian Dividend Aristocrat. It raised the annual dividend by 10% earlier this month, marking its 25th consecutive year of dividend growth. At this pace, investors can expect a substantial gain from passive income alone. 

Low valuation

Unsurprisingly, Enbridge stock is trading at a modest valuation. The stock currently trades at 17 times earnings, two times sales, and 1.68 times book value per share. 

The lower valuation is a reflection of the market’s pessimism on oil and gas stocks. However, if the industry’s prospects improve and sentiment shifts over the next few years, early shareholders could be in for a substantial windfall. 

Coupled with the hefty dividend yield, capital gains from a re-valuation of the stock could significantly boost long-term performance for patient investors. 

Bottom line

The energy sector has had a tough year, and pessimism is now so pervasive that some stocks in this sector are starting to look attractive. Stocks like Enbridge have been pushed so low that the dividend yield alone promises decent returns.  

Gradual progress on pipeline development, the steady dividend yield, and low valuation all make Enbridge stock a worthy contrarian bet for 2020. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool owns shares of and recommends Enbridge. Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. 

More on Energy Stocks

Man considering whether to sell or buy
Energy Stocks

When to Sell Suncor Energy (TSX:SU) Stock

Suncor Energy (TSX:SU) stock surged significantly in 2022. But the recent 20% dip got investors worried. Here’s when you should…

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

2 Energy Stocks Fly Higher Amid Recession Fears

Despite growing recession fears, two energy stocks continue to fly high and deliver positive returns to shareholders.

Read more »

oil and natural gas
Energy Stocks

Forget About Oil Prices With This 1 Stock

Looking for the perfect investment that can make you forget about oil prices rising? Here’s one energy stock to buy…

Read more »

TSX Today
Energy Stocks

TSX Today: What to Watch for in Stocks on Thursday, June 30

Continued weakness in key global stock indexes and easing commodity prices point to a lower opening for the TSX Composite…

Read more »

Oil pumps against sunset
Energy Stocks

How Would a Price Cap on Russian Oil Impact Canadian Energy Stocks?  

Canadian energy stocks surged in the last three days, as G7 countries proposed a plan to impose a price cap…

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

2 Energy Stocks (With Dividends) to Buy Amid the Market Correction

These dividend-yielding energy stocks look attractive to buy for the long term after their recent dip.

Read more »

energy oil gas
Energy Stocks

2 Energy Companies to Buy When the Sector Hits Rock Bottom

Multiple factors, including the TSX decline, are contributing to the current slump in the energy sector.

Read more »

think thought consider
Energy Stocks

Energy Stocks Dip: To Buy or Not to Buy?

Most energy stocks are risky investments, because of their unpredictable profitability. Investors should tread carefully.

Read more »