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ENB Stock: A Look at Enbridge’s Dividend-Adjusted Returns in the Last Decade

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When you try to identify quality dividend stocks, it’s difficult to miss Canadian energy giant Enbridge (TSX:ENB)(NYSE:ENB). A diversified midstream energy company, Enbridge is one of the largest companies in Canada valued at a market cap of $100 billion and an enterprise value of $178 billion.

Enbridge transports and stores natural gas, liquids, and oil. The company’s liquid operations generate over 50% of total earnings while the rest is derived from its natural gas and midstream operations. Further, Enbridge is expanding its base of renewable energy assets, which account for approximately 4% of total earnings.

ENB stock has remained volatile, but dividends are steady

The prices of crude oil have fluctuated wildly in the last seven years, which has impacted ENB stock as well. However, while most energy companies were grappling with massive losses driven by lower oil prices amid COVID-19 last year, Enbridge’s adjusted EBITDA was flat year over year. Several companies part of this cyclical sector slashed or even suspended dividends due to the ongoing pandemic, but Enbridge maintained its payout, which underlines its resilient business model.

Enbridge provides investors with a forward yield of a healthy 6.8%. It means $10,000 invested in ENB stock will allow you to generate $680 in annual dividend payments. In the last 10 years, Enbridge stock has returned just over 50% in terms of stock price appreciation. But after accounting for dividends, total returns are close to 150%.

ENB has increased dividends at an annual rate of 10% in the last 26 years. It now expects to deploy $10 billion in capital expenditures this year, which will support further dividend increases. The company forecasts to increase distributable cash flows between 5% and 7% through 2023. It also expects to pay between 60% and 70% of its DCF as dividends, making the payouts sustainable.

Enbridge has a robust business model

One major reason why Enbridge has been able to not only sustain but also increase dividend payments across economic cycles is due to its resilient business model. Its naturals gas distribution and transmission business are part of a regulated industry, which means cash flows are stable.

Further, the tolls on the company’s liquids pipeline system are backed by long-term contracts, which insulate Enbridge from commodity price fluctuations. Its transmission assets are also backed by take-or-pay contacts where customers pay a penalty for any unused contracted capacity. In a nutshell, just 2% of ENB’s cash flows are exposed to commodity prices.

Enbridge is part of an industry that has high entry and regulatory barriers. As new pipeline capacity seems a difficult proposition due to environmental concerns, Enbridge’s already existing capacity will position the company to deliver predictable earnings in 2021 and beyond.

The final takeaway

Enbridge’s debt-to-EBITDA multiple stood at 4.6 at the end of 2020 which might seem steep. However, it’s well within the company’s target range of 4.5 to five. We can see that Enbridge’s dividend payout is covered by its expanding DCF, and the company’s strong balance sheet provides it with enough flexibility in turbulent times, such as a pandemic.

The company’s solid combination of diversified operations, contract-based business, earnings expansion, and dividend growth make it a top stock for long-term investors.

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.

Fool contributor Aditya Raghunath owns shares of ENBRIDGE INC. The Motley Fool owns shares of and recommends Enbridge.

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