TSX energy giant Enbridge (TSX:ENB) currently offers investors a tasty dividend yield of 7.4%. After touching record highs in 2022, ENB stock is currently trading 27% below its all-time high prices, driving the dividend yield higher.
Enbridge is among the most popular dividend stocks in Canada and has increased these payouts for 28 consecutive years. These hikes have come at an annual rate of 10%, showcasing the resiliency of Enbridge’s business model.
Let’s see how Enbridge can sustain its high dividend yield and if it has room to increase the payouts further in the near term.
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Is Enbridge stock a buy, sell, or hold?
Enbridge is a diversified energy infrastructure company trading at an enterprise value of $184 billion. Armed with four core businesses that include liquids pipelines, natural gas pipelines, gas utilities and storage, and renewable energy, Enbridge transports 30% of crude oil produced in North America and 20% of the natural gas consumed in the United States. In terms of consumer count, Enbridge is the third-largest natural gas utility in North America.
The energy behemoth is uniquely positioned to help accelerate the clean energy transition globally. As an early investor in renewable energy, Enbridge now has a growing offshore wind portfolio with clean energy now accounting for 4% of adjusted EBITDA (earnings before interest, tax, depreciation, and amortization).
Enbridge’s low-risk commercial and financial profile allows the company to generate predictable cash flows across business cycles. Around 98% of cash flows are contracted, 80% of which are indexed to inflation, making it immune to fluctuations in commodity prices. Further, 95% of counterparties have an investment-grade balance sheet which lowers credit risk by a significant margin.
A utility-like approach and disciplined investments in energy infrastructure have resulted in cash flow and dividend expansion, leading to outsized shareholder returns. Enbridge has increased its EBITDA from $2.5 billion in 2008 to $15.5 billion in 2022. It expects to end 2023 with EBITDA between $15.9 billion and $16.5 billion, despite lower oil prices.
In the last 15 years, Enbridge has also grown its dividends per share from $0.66 in 2008 to $3.55 per share in 2023.
What’s next for ENB stock price and investors?
Enbridge continues to invest in capital expenditures to expand its base of cash-generating assets. It expects organic growth to help it increase EBITDA and earnings by 5% annually through 2025, which should support dividend hikes.
Since 2019, the company has increased distributable cash flow per share by 6% annually, despite the COVID-19 pandemic and an inflationary environment.
It aims to maintain a payout ratio of between 60% and 70% offering enough room to reinvest in growth, enhance dividends, and lower balance sheet debt. With total debt of $80 billion, Enbridge has a leverage ratio of around five times, which is within its guidance range.
Priced at 16.6 times forward earnings, ENB stock trades at a reasonable valuation, given earnings growth estimates and a tasty dividend yield. Analysts tracking Enbridge stock expect it to gain over 20% in the next 12 months. After adjusting for dividends, total returns will be closer to 30%.
