The Motley Fool

3 Reasons to Buy Enbridge (TSX:ENB) after its Solid Q1 Earnings

Image source: Getty Images

Oil and gas producers have taken a hard hit amid lower crude prices recently. Downstream companies have been no different as they could not make money on the lower oil prices given the decline in demand caused by the pandemic.

However, there are energy infrastructure companies like Enbridge (TSX:ENB)(NYSE:ENB) that have stood fairly well during this double whammy. Importantly, Enbridge’s first-quarter earnings underline that it is a compelling investment for long-term investors.

Enbridge: Solid Q1 earnings

On May 7, Enbridge reported higher earnings for the first quarter and exceeded expectations. What’s important to note here is that Enbridge has maintained its earnings outlook for the fiscal year 2020.

While many energy companies are expecting lower earnings and are not too hopeful for the rest of 2020, Enbridge’s upbeat commentary is indeed soothing for investors.

Many oil-producing companies are standing on the verge of bankruptcy this year amid their huge debt piles and lower production. However, Enbridge stands solid on this front too with 95% of its clients having an investment-grade credit rating.

A $37 billion pipeline company has an unparalleled network of pipelines that generates stable cash flows. These are mostly fixed-fee long-term contracts that generate a steady cash stream irrespective of crude oil prices.

It carries 25% of the oil and 20% of the total natural gas needs of North America. Its pipeline network is difficult to replicate and acts as a high barrier for new entrants.

Stable dividends

Enbridge’s stable earnings outlook indicates that the company is well placed to pay dividends in 2020. Canadian energy giant Suncor Energy announced a steep dividend cut this week in order to retain cash. The oil major Shell also cut its dividends for the first time in 75 years. That’s mainly because these two have significant direct exposure to crude oil prices, unlike Enbridge.

ENB stock currently offers a dividend yield of 7.5%, notably higher than TSX stocks in general. Apart from a juicy yield, its dividend growth also significantly contributes to investors’ long-term returns. It managed to increase dividends by 16% compounded annually in the last five years, largely due to consistent earnings growth.

Attractive valuation

Enbridge stock was trading at $44.6 at the time of writing, almost 22% lower than its 52-week high. The stock does not look too stretched compared to its historical average valuation. This indicates that it might have more room for growth going forward with a limited downside.

Also, more investors could turn to this dividend giant as it has maintained its payouts for 2020, in contrast to industry trends.

At the end of the first quarter of 2020, Enbridge reported available liquidity of $14 billion. This cash and favourable leverage place it in a much stronger position to weather the crisis.

Oil and gas prices could remain weak as long as the COVID-19 pandemic suppresses energy demand. While the outlook for the energy sector remains bleak, pipeline companies like Enbridge look to stand tall. Its cash flow stability along with balance sheet strength will most likely help it emerge stronger after the crisis. Enbridge’s dividends and fair valuation further add to an attractive investment proposition for long-term investors.

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.
Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

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 Vineet Kulkarni has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.