Enbridge Inc (TSX:ENB)(NYSE:ENB) stock is a proven winner. Since 1995, shares have risen by more than 1,100%. That’s not even including the annual dividend, which now tops 7%. If you want to capitalize on the market rally without assuming a ton of risk, this stock is for you.
Historically, Enbridge has been a great way to play bull and bear markets. For more than two decades, shareholders have achieved consistent double-digit returns, year after year. In 2019, when stock markets were surging, Enbridge stock delivered a 30% gain. In 2008, when stock markets were plunging, shares still turned a profit of 5%!
Before you invest in this stock, however, there are a few things you need to know. But one thing is certain: this looks like a great place to invest during the market rally.
Ready for trouble
Enbridge is a stock built for volatility. The company operates the largest pipeline network in North America. It transports roughly 20% of the continent’s crude oil and natural gas. Keep in mind that this is an industry where scale means everything.
When transporting crude oil, the first stop is often a refinery. Oil producers in rural Alberta, for example, must get their output refined into a usable product. The fastest, cheapest, and safest method is via pipeline.
But which refinery should an oil producer choose? Prices and capabilities vary. The larger the network, the more options customers have. As the largest player, Enbridge is a top choice, regardless of a market rally or downturn.
Post-refinery, the processed product still needs to make its way to market. That could be an end user in North America or an export terminal on the coast, with eventual plans of reaching European or Asian markets. With coast-to-coast access, Enbridge can ensure its customers fetch the highest prices, reaching the most lucrative end-points.
Due to these factors, Enbridge can charge customers on volumes, not commodity pricing. In 2014, when oil prices were cut in half, Enbridge’s profits remained intact due to stable volumes. The stock price rose that year, even though commodity prices tanked.
This stability allows the company to pay out a sizeable dividend. Today, the yield exceeds 7%.
Play the market rally
Enbridge stock rarely goes on sale. The coronavirus pandemic is the exception. In recent weeks, shares have fallen by 25%. What’s the deal?
As mentioned, Enbridge stock usually doesn’t respond to daily swings in commodity prices. But with oil prices now below US$20 per barrel, the company was dragged lower alongside the market.
The bet is simple. If the market rally helps oil prices to rebound, Enbridge will return to business as usual. The company’s 7% dividend will be in no danger. However, if oil prices remain depressed, some of its customers will cease production, leading to a decline in volumes, and thus a decline in profits.
What does the future hold?
Depressed oil prices stem from a supply spat between Saudi Arabia and Russia, plus reduced demand from the coronavirus pandemic. Eventually, supply issues should get sorted out, as the current pricing environment benefits no one on that side of the equation.
On the demand side, it could take months or even years for a return to baseline. But there’s no doubt that a normalization will occur.
Long term, Enbridge’s profit sources will return to normal. Its pipeline network is simply too valuable to be ignored or replaced.
The dividend may be cut in 2020 to shore up cash, but if you can remain patient, this looks like a valuable long-term bet.
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The Motley Fool owns shares of and recommends Enbridge.
Fool contributor Ryan Vanzo has no position in any stocks mentioned.