As one of Canada’s essential energy infrastructure companies with a vast North American presence, Enbridge (TSX:ENB) is a vital part of the North American economy. Today, Enbridge stock is trading at an elevated dividend yield of 6.88%, despite a strong balance sheet and cash flows.
As we look ahead, many factors point to strong performance for TSX stock Enbridge. Let’s consider three of these factors and the upside they provide for Enbridge stock.
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Enbridge is relatively sheltered from oil and gas price volatility
Unlike traditional oil and gas companies, Enbridge’s energy infrastructure business is very sheltered from commodity price volatility. This is because a big chunk of Enbridge’s EBITDA (earnings before interest, taxes, depreciation, and amortization) is regulated. This protects Enbridge from inflation, and it secures a predictable and resilient cash flow stream.
In fact, this characteristic has helped give Enbridge a stability and predictability that should be very valuable for investors. For example, Enbridge generated EBITDA of $15.5 billion in 2022. Also, management reaffirmed its 2023 guidance range for EBITDA of $15.9 billion to $16.5 billion.
Also, Enbridge’s dividend has been consistently increasing over time, with great predictability and reliability. In fact, Enbridge has 28 years of annual dividend increases under its belt. Its latest dividend increase was a 3.2% increase in its quarterly dividend earlier this year. In the last 20 years, Enbridge has grown its dividend at a compound annual growth rate (CAGR) of more than 10%.
A dividend yield of 6.88%
After many years of increasing dividends and growing its business, Enbridge stock currently stands tall with a 6.88% dividend yield. This is an extraordinary yield, especially if we consider the relatively low-risk nature of Enbridge’s business.
Oil and gas are both a strong part of our history. These energy sources have taken us into years of economic growth and improvement of our standard of living. While these energy sources must be transitioned away from, they continue to be essential today. Enbridge controls over 70% of Canada’s takeaway oil capacity and its heavily relied upon by U.S. refineries. These refineries provide a stable and secure source of demand.
All of this has supported and will continue to support Enbridge’s dividend.
Enbridge positions itself for a low-carbon future
As far back as 20 years ago, Enbridge saw the writing on the wall. Thus, the company began investing in renewable energy sources. Today, this segment is contributing a small amount to Enbridge’s earnings but will accelerate going forward. In 2023, renewables are expected to account for 3% of Enbridge’s EBITDA.
You see, Enbridge is in full construction mode in this segment with four offshore wind farms and 10 solar operations in construction. A large wind farm in France was recently completed, with Enbridge boasting on-time and on-budget completion. Saint Nazaire is France’s first operational offshore wind farm, providing 480 megawatts of electricity, which is enough to provide 700,000 people with electricity every year.
Good days ahead for TSX stock Enbridge
So, what does this all mean for Enbridge’s stock price? Well, the stock is trading at 17 times this year’s expected earnings. It has a stable and predictable earnings and cash flow history. And, the company is essential in the functioning of the North American economy.
2026 should be an inflection year, with excess capital coming from the completion of current growth projects. As such, I think a three-year target price of over $65 for Enbridge stock is a very reasonable expectation. Add Enbridge’s annual dividend yield to this approximately 20% capital return expectation, and we have a very robust investment opportunity.
