Energy giant Enbridge Inc. (TSX: ENB)(NYSE: ENB) has lost a quarter of its market value this year. In fact, Enbridge stock is now trading at the same level it was nine years ago! That’s an entire decade of capital appreciation eliminated in just a few months.
Nevertheless, the company has managed to sustain its dividend payout, which means the stock now offers an incredible 8.3% dividend yield. A $10,000 investment in Enbridge stock could generate enough passive income to cover nearly two weeks worth of Canada Recovery Benefit (CRB) payments.
For contrarian investors, this seems like an unbelievable opportunity. But does the risk-reward ratio justify adding this controversial stock to your portfolio? Should you avoid the energy market altogether? Here’s a closer look.
Enbridge stock dividend
Like any other high-yield dividend stock, the key issue is whether the dividend is sustainable. If Enbridge is at risk of cutting its dividend within the next few years, you probably want to steer clear of it.
Fortunately, on this metric, the company seems to be in good shape. Management expects to generate $5.9 to $6.3 per share in distributable free cash flow this year. That’s because demand for natural gas has been relatively robust, despite the pandemic. Meanwhile, this year’s expected dividend is $2.46.
That means Enbridge stock could generate roughly double the amount it needs to provide a dividend. That makes the dividend incredibly reliable.
Enbridge stock valuation
Unsurprisingly, Enbridge stock is also trading at a beaten-down valuation. Investor anxiety about energy demand has pummelled all oil and gas stocks this year. However, Enbridge isn’t an oil and gas producer, but a transporter. In other words, it owns and operates the pipelines used to distribute gas.
In fact, Enbridge supplies 25% of crude oil produced in North America, and nearly 20% of the natural gas consumed in the U.S. Volumes dipped this year as North America went into lockdown, but should recover next year as the economy regains momentum.
That bounce back hasn’t been priced into the Enbridge stock price yet. The stock trades at six times earnings before interest, taxes, depreciation and amortization (EBITDA). That’s far below its historic average of 8.9 times EBITDA. The stock also trades at a forward price-to-earnings ratio of 14.3 and just 34% higher than book value per share.
It’s the ultimate value stock. In this environment, it’s also an incredible contrarian opportunity, especially for income-seeking investors. My Fool colleague Andrew Button believes a Trump re-election could be the catalyst that helps unlock value in Enbridge stock. At this point, that seems fairly likely.
Bottom line
Enbridge stock seems deceptively risky. The oil and gas sector is in a vulnerable spot and the slowdown in global economic growth is likely to weigh on energy demand for years. Nevertheless, Enbridge’s business model is based on infrastructure and is well-diversified.
Their dividend is sustainable, given their projections for free cash flow, which makes it an excellent opportunity for income-seeking investors looking for a bargain. In fact, the Motley Fool owns and recommends it too.
