Shares of Canadian energy giant Enbridge (TSX: ENB)(NYSE: ENB) have gained close to 11% in the first two trading days of the week. Enbridge stock gained momentum soon after Pfizer announced its COVID-19 vaccine results have indicated an efficacy rate of over 90%.
This resulted in positive market sentiment as investors expected oil demand to improve especially if the dreaded virus is brought under control. That said, the vaccine needs to first be approved after which it will take another two years to manufacture and distribute it to the global populace.
This means it will take at least another year for oil demand to reach pre-pandemic levels. However, while oil stocks should continue to remain range-bound in the near-term, you can bet on diversified energy heavyweights such as Enbridge for market-beating gains.
Enbridge has a robust business model
Enbridge reported solid Q3 results last week. Its adjusted EBITDA fell just 3.6% to $3 billion while distributable cash flow was down 0.8% year-over-year at $2.08 billion. This meant DCF per share was $1.03, indicating a dividend payout ratio of 78.7%.
Enbridge’s diversified portfolio allowed the company to tide over a sluggish macro environment and post stellar quarterly results. It experienced a year-over-year growth in the gas distribution and storage segment, offsetting weaker revenue in the liquids pipeline segment.
Enbridge’s earnings in liquids pipelines was down 5% due to lower volumes. Comparatively, earnings in the gas distribution and storage segment were up 23.5% driven by customer growth, an uptick in rates as well as cost savings arising out of the merger of its gas utilities.
Enbridge is also investing heavily in the renewable energy space, and earnings in this business was up 13% year-over-year in Q3.
What next for Enbridge investors?
Enbridge’s impressive Q3 results have meant it is on track to deliver full-year DCF per share of between $4.5 and $4.8 which is in line with its guidance, which indicates a payout ratio of 70% at the midpoint which means the stock’s forward dividend yield of over 8% is sustainable.
The company continues to focus on cost reduction and improving liquidity to offset lower volumes. Further, Enbridge also expects to increase DCF between 5% and 7% in the next two years allowing it to support future dividend growth. Enbridge has increased dividends at an annual rate of 11% since 1995, making it one of the top income stocks on the TSX.
It now aims to have a payout ratio of between 60% and 70% and a debt to EBITDA multiple of below five. Enbridge has $11 billion as backlogs in expansion projects across business segments which will drive future cash flows higher.
While fossil fuels account for the majority of sales for the company, Enbridge is also building two offshore wind farms in Europe and completed its first solar power gas-compression system south of the border.
Enbridge is one of the most stable companies in the Canadian energy sector. It has an investment-grade balance sheet and a low-risk business model that is backed by long-term contracts as well as regulated rates.
