The energy sector is not what it used to be. The capped energy index has gone down 42.8% in the past five years compared to the growth of the 16.3% TSX composite index. Still, many dividend stars in the sector have continued to reward their investors and have kept up the aristocratic streak of increasing payouts during some of the toughest years the sector saw.
Enbridge holds the distinctive position of maintaining and operating the most extended and complex crude oil and liquids transportation system in the world, which extends over 27.5 kilometres across the country and in the U.S. (split evenly). And that’s just one of the company’s three major operating avenues. The company also transports almost 19% of the natural gas consumed in the U.S. and has over 3.8 million consumers in the country.
The company is also diversifying its energy portfolio for sustainable options. It has developed a 2,000 MW generation capacity with solar and wind farms in North America and Europe, lighting up about 900,000 homes.
Enbridge is a market leader in its sector as well as the most consistent Dividend Aristocrat, with a history of increasing dividends for about 25 years. And the increase in payouts is more than just symbolic. The company grew its payouts by 74% in the past five years, increasing $0.465 per share dividend to $0.81 per share. Currently, the company is offering a juicy yield of 5.73%.
If it continues along the same path, your $20,000 investment, which will earn you about $1,140 in dividends now, would easily earn you over $2,000 in five years.
Also, the company’s expansion plans of Line 3 replacement and Keystone XL pipeline have jumped the regulatory hurdles that have prevented these projects from gaining momentum.
Ironically, the bad thing about the company is tied to its amazing dividends. The current payout ratio is about 99.8%, and it has been hovering around it for the past three years. And even with the company’s history of keeping up and increasing its dividend payouts, this doesn’t seem very sustainable.
Another shortcoming is market value growth. Though the past year has been relatively strong for the company, its market value has not experienced substantial growth in the past five years. Its (adjusted for dividends) CAGR has only been 3.26%.
Enbridge increased its dividends through some of the toughest years of the industry, and it’s unlikely that the company is going to break its stride. Though for how long can the company keep issuing dividends on a payout ratio that is undermining its income is yet to be seen.
But if the company’s growth projects take off and substantially increase its transportation capabilities, the cash in-flow is likely to increase as well. This will re-establish the balance between income and payouts and offer more sustainability of dividends.
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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.
Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.