In the energy sector,Ā EnbridgeĀ (TSX: ENB)(NYSE: ENB) continues to be my highest conviction TSX pick. This company is built to be recession-proof, and this stock is priced well to manage another crisis like the one we experienced in 2020.
Here’s why I think Enbridge is a good buy today if you think a market crash could be on the horizon.
Tons of value built into Enbridge’s stock price right now
Much this stock price appreciation involves a growth to value rotation that’s just beginning. This rotation is evident given how we’ve seen stock prices in certain sectors move of late. For example, Enbridge’s stock price has been on a tear since the beginning of the year. This is a stock that is up around 10% over just a couple of weeks.
If this rotation continues as I expect it will, Enbridge could outperform its peers for a number of reasons. Among them, high-quality counterparty contracts resulting in cash flow security is top of my list. Not far down would definitely be the potential for outsized growth with new pipeline expansion projects coming online soon.
Enbridge is a defensive, value-oriented pick in a market that has run wild in terms of valuation of late. I think this is a stock that is trading at least 25% below its fair value. Additionally, given its value profile right now, if capital flows change, Enbridge is an easy target for this capital. The company’s utility-like operations provide sufficient cash flow safety to support a long-term growth thesis both on the capital appreciation side as well as for dividend growth.
Is Enbridge’s dividend sustainable?
Furthermore, as we see investors price in rock bottom interest rates for much longer, companies like Enbridge look really cheap right now. This is a company with a dividend yield of 7.4% right now. That’s incredibly high – so high that some might wonder about its safety. That said, this company’s dividend is actually one of the safest in the industry today.
A variety of headwinds related to the energy sector are being priced into this stock right now, pushing its yield to abnormally high levels. Namely, issues with some of the company’s pipeline expansion projects have clogged up the headlines and detracted from the investment thesis in this stock.
Should we see these headwinds dissipate this year — which is quite likely — we could see Enbridge’s yield drop. Accordingly, the company’s share price could see some very nice appreciation after a rocky 2020.
