The energy sector accounts for 13.3% of the S&P/TSX Index. This index is generally a proxy or the principal measure for the equity markets in Canada. One of the top holdings in the energy sector in Enbridge (TSX:ENB)(NYSE:ENB).
Enbridge is one of the largest companies in Canada with a market cap of $88 billion and an enterprise value of $161 billion. It has long been one of the top investment options for income investors due to its attractive dividend yield and increases in payouts over the years.
People who invested $10,000 in Enbridge at the start of 2020 would have $8,435 today, indicating a total return of -15.5%. Comparatively, the S&P 500 has gained a stellar 14% year to dat0,e despite the bloodbath witnessed in early 2020.
Enbridge stock should recover in 2021
However, despite its poor performance this year, Enbridge remains a top buy for 2021 and beyond. In 2020, the energy sector has been the worst-performing one, but Enbridge has managed to outperform its peers.
Its price depreciation also indicates that shares are now selling at a bargain. This means there is significant upside on the horizon, especially if crude oil prices move higher in 2021.
Enbridge’s dividend yield stands close to 7.7% right now, which means a $10,000 investment in the energy giant will generate $770 in annual dividends. The company has increased dividends at an annual rate of 11% in the last 25 years, making it a top pick for income investors.
However, due to the weakness in the energy sector, its dividend-growth rate has fallen to about 6% in the last year. Going ahead, investors can expect Enbridge to grow these payouts at an annual rate of between 5% and 7%.
Enbridge has a diversified portfolio of cash-generating, fee-based midstream assets. It has a vast footprint in North America with an investment-grade balance sheet. In fact, over 90% of Enbridge’s EBITDA is derived from regulated or long-term contracts.
Alternatively, Enbridge has raised debt to improve liquidity and strengthen its balance sheet in 2020. Its financial debt to EBITDA multiple is seven, which indicates it cannot afford to aggressively increase its owed capital given the ongoing uncertainties in the energy space.
A durable business for a volatile year
Enbridge’s business has proven to be resilient and durable amid the pandemic-induced chaos. It expects to be on track to reach the midpoint of its original distributable cash flow guidance of between $4.5 and $4.8 per share for 2020, despite all the turbulence witnessed this year. This allowed Enbridge to increase dividends by 3% recently.
In 2021, the company expects to report distributable cash flow per share between $4.70 and $5.00, as expansion projects bear fruit. It also indicates Enbridge’s payout ratio for 2021 stands at 69% giving it the flexibility to reinvest in expansion projects.
Enbridge has a backlog of expansion projects totaling $16 billion that includes offshore wind farms as well as new pipelines. These projects should drive cash flow higher in the upcoming quarters, allowing the company to meet dividend obligations.
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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.
The Motley Fool owns shares of and recommends Enbridge. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.