Enbridge (TSX:ENB)(NYSE:ENB) is one of the best-performing stocks in Canada. Since 1995, shares have produced average annual gains in the double digits, aided by a hefty dividend that now stands at 7.5%.
Yet many worry that the best days are gone. Shares are lower by 20% since the start of 2015.
The days of growth may be over, but the market misunderstands this stock’s future. Not only will Enbridge survive 2021, but it could be a core holding for dividend investors.
The story is now income, not growth
Enbridge is a pipeline stock. For decades, this meant growth. Oil and natural gas production throughout North America surged between 1995 and 2015, pushing up demand for pipeline infrastructure. After all, all of those fossil fuels needed to get to refineries and eventually to market. Pipelines are the most proven way to do that in a safe, cost-effective manner.
In 1995, Enbridge was worth just a few billion dollars. By 2015, its market cap peaked above $100 billion. Long-term shareholders were mightily rewarded.
But times change. In 2014, oil prices were slashed in half. Production continued to grow, but only because the cost of production continued to fall. The COVID-19 crisis added even more demand pressure, keeping fossil fuel prices at historically low levels.
There’s one thing you should know: no matter where energy prices go, Enbridge’s pipelines will still have high demand. Even in very bearish scenarios, there will be plenty of fossil fuel production in North America to fill capacity.
Sure, slowing demand may limit growth opportunities, but that just means the company will transition to a toll-road model, capitalizing on steady demand that will still persist for a decade or more.
The trick to analyzing this stock isn’t to view it as a growth play. Instead, it’s all about the income.
Enbridge stock is a dividend superstar
To understand how this stock will be an income investor’s dream, you need to learn how pipeline economics work. It’s actually quite simple. You spend billions to build the initial infrastructure, but then ongoing expenses are fairly low, meaning cash flow generation is very high.
The company’s new project, for example, will contribute huge sums of cash flow from day one.
“Once Line 3 is in service, it’s going to contribute a lot of free cash flow — and this year we anticipate it will be about $200 million in Q4 — with volumes and EBITDA ramping up in 2022,” said Enbridge CEO Al Monaco.
What does Enbridge do with this money? Historically, it’s redeployed the capital into growth projects, dividend payments, and debt servicing. Now that growth opportunities are limited, the market has soured on the stock, but it still has plenty to offer in terms of income.
After the pullback, ENB stock now pays a 7.5% dividend. That’s well above its 10-year average. As the market removes the stock from its growth list, there’s a chance to profit by viewing this as an income investment.
Don’t expect double-digit returns for decades on end, but as Enbridge shares stabilize, there’s an opportunity for reliable, market-leading dividend income.
Our stock-picking pros like Enbridge, but they LOVE the stocks below...
Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.
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 Ryan Vanzo has no position in any stocks mentioned.