The economic reopening and an uptick in economic activities, underinvestment in new supplies, and supply disruption from Russia’s invasion of Ukraine led to a surge in commodity prices, including oil and natural gas. Thanks to the higher average realized prices, the demand for Enbridge’s (TSX:ENB) energy infrastructure assets increased, driving its stock price higher. Enbridge stock gained 14% in 2022 compared to about 9% decline in the S&P/TSX Composite Index.
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Is Enbridge a buy at current levels?
Enbridge is an integral part of the energy value chain. Through the Gas Transmission and Midstream segment it transports about one-fifth of the natural gas consumed in the U.S.
Further, through its Liquids Pipelines business it transports about 30% of the crude oil produced in North America to refiners and markets in the U.S., Gulf Coast and Eastern Canada. Meanwhile, its Gas Distribution and Storage unit has metered connections and supplies energy to the Ontario residents.
Enbridge also continues to ramp up its low-carbon investments and has ownership interests in renewable energy facilities.
Given Enbridge’s key role in the energy supply, it is poised to deliver strong financials in the coming years. This could support its stock price. Despite macro headwinds, Enbridge’s management expects its EBITDA (earnings before interest, tax, depreciation, and amortization) to grow by about 6% in 2023. Benefits from the new assets placed into service, high utilization rate, and revenue escalators will likely drive its earnings.
Enbridge stock is trading at the next 12-month enterprise value-to-EBITDA multiple of 12.4. This multiple is lower than the pre-COVID levels, providing a solid entry point.
Another reason to buy Enbridge stock
Besides offering capital gains, this large-cap company is a reliable bet for passive income. Enbridge is among the top dividend stocks listed on the Canadian stock exchange that has paid and raised dividend amid all market conditions.
While major energy companies cut their payouts amid the pandemic to remain afloat, Enbridge continued to pay its regular dividend and uninterruptedly increased the same. It has been paying a regular dividend for about 68 years. Meanwhile, it hiked its dividend at a CAGR (compound annual growth rate) of 10% in the past 28 years.
Enbridge’s resilient dividend payments are covered through its diversified cash streams. Moreover, contractual arrangements to reduce price and volume risk, solid secured projects, and continued investments in conventional and renewable energy assets bode well for future growth.
Notably, most of Enbridge’s adjusted EBITDA has protection against inflation, which drives its distributable cash flow per share and supports its higher dividend payments. Further, its payout ratio of 60-70% of distributable cash flow is sustainable in the long term.
Bottom line
The ongoing strength in Enbridge’s core businesses and a secured backlog of $17 billion will likely support its organic growth. Moreover, strategic mergers and acquisitions opportunities are expected to bolster its growth. Further, its strong balance sheet and energy transition opportunities should accelerate its growth. Enbridge pays a quarterly dividend and offers a high and reliable yield of 6.7%.
