Warren Buffett’s Berkshire Hathaway is buying almost all of Dominion Energy’s gas transmission and storage assets. The US$9.7 billion all-cash deal includes US$4 billion of assets and debt of US$5.7 billion.
Why Warren Buffett is buying gas infrastructure assets
Since the Oracle of Omaha is buying Dominion Energy’s gas assets, there must be money to be made in the gas infrastructure space. We can get big hints on why he might have approved the purchase by looking more closely at Enbridge (TSX:ENB)(NYSE:ENB) stock.
Enbridge is a North American energy infrastructure leader with a massive gas infrastructure business. More specifically, it generates about 40% of its EBITDA from its gas transmission, distribution, and storage operations.
These quality assets help contribute to Enbridge’s diversified EBITDA, which comes from more than 40 sources, including refiners, utilities, and integrated producers. Importantly, 95% of Enbridge’s counter-parties are investment grade and about 98% of its EBITDA is contracted.
At the end of day, this means that Enbridge generates stable cash flows that are resilient in today’s environment, despite COVID-19 disruptions to the economy and energy demand. Consequently, ENB stock is able to pay a generous dividend.
Enbridge stock’s dividends and total returns
Since 2010, Enbridge stock has generated decent total returns of over 9% per year on the TSX. This speaks volumes, as the stock dropped by 25% from its high this year. Notably, a third of the 9% rate of return came from dividends.
Today, the stock offers a much bigger yield than it did in 2010 — 7.8% now versus 3% then. Therefore, investors buying today can enjoy even more predictable returns from dividends instead of having to rely on stock price appreciation.
Regardless, buyers now should experience market-beating returns from ENB stock’s dividend alone. However, it’s more likely that the dividend stock will deliver a better rate of return than 8%.
Enbridge should experience valuation expansion from today’s relatively cheap levels. As well, the company should drive stable growth of at least 3% per year over the longer term, which will also boost total returns.
Despite a challenging economic environment, Enbridge expects its distributable cash flow per share to grow marginally this year. The company’s midpoint guidance implies that it can keep its dividend safe with a payout ratio of roughly 70%.
The Foolish takeaway
Investors do not need to just admire Warren Buffett’s purchase of Dominion Energy’s gas infrastructure assets. Enbridge is a market leader that has a big portion of its business in that space. In fact, the company had the foresight to buy Spectra Energy several years ago to significantly boost its scale in gas infrastructure. And now, investors can buy the energy giant at a discount of roughly 20%, according to the average analyst’s 12-month price target.
To follow Warren Buffett’s move to add gas infrastructure to your investment portfolio, you can consider Enbridge now. You’ll be buying an undervalued investment just like Berkshire and get a big dividend income doing so!
$10,000 worth of ENB stock will generate about $786 of dividends a year for starters. The Canadian Dividend Aristocrat should be able to continue growing its dividend over the next few years. This should lead to an investment that’ll return more than 10% per year over the next three to five years.
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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 Kay Ng owns shares of Berkshire Hathaway (B shares) and Enbridge. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Enbridge and recommends the following options: short September 2020 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and long January 2021 $200 calls on Berkshire Hathaway (B shares).