Enbridge (TSX:ENB) stock offers a big dividend. However, at $45 and change per share, the stock trades at similar levels in terms of stock price as in 2013, as growth has tapered off. For a decade from 2009, Enbridge stock was growing its dividend at a double-digit rate every year. However, it’s also true that its payout ratio has been expanding. Currently, the dividend stock targets a payout ratio that’s 60-70% of its distributable cash flow (DCF).
Although the stock price is about the same as 10 years ago, the stock has gone up and down several times in between. A high that it could revisit again is the $56-57 range. In other words, it could be a plausible strategy to buy low and sell high, while getting outsized dividend income from the stock.
What’s weighing on the stock?
Higher interest rates and slower growth have pressured the stock since 2022. The latest dip of close to 7% last week was due to an equity offering. Specifically, Enbridge sold $4.6 billion worth of common stock from its inventory of treasury shares in a bought deal offering. The group of underwriters, including the Big Six Canadian banks, sold the shares to the market for $44.70 a share. This sudden surge of shares sold at a lower price to the prior day’s market price of about $48.25 was what caused the selloff.
Acquiring gas utility assets
The equity offering was for Enbridge to raise cash to help it finance the acquisition of three natural gas distribution utilities from Dominion Energy for about $19 billion (i.e., US$14 billion) at a reasonable multiple of about 16.5 times this year’s earnings.
The gas utilities serve approximately three million homes and businesses in Ohio, North Carolina, Utah, Wyoming, and Idaho and collectively consist of about 125,528 km of natural gas distribution, transmission, gathering, and storage pipelines. This greatly expands Enbridge’s gas portfolio, adding to its existing gas utility operations that serve about 15 million people in Ontario and Quebec.
Enbridge’s press release of the strategic acquisition highlighted that the “compounded annual growth rate of approximately 8% on the consolidated rate base is expected to deliver long-term value for Enbridge shareholders.” Additionally, it is “expected to be accretive to DCF per share and adjusted earnings per share in the first full year of ownership, increasing over time driven by the addition of approximately $1.7 billion of annual, low-risk, quick-cycle rate base investments to Enbridge’s secured growth backlog.”
The acquisition is viewed as a defensive move that would result in Enbridge’s earnings mix of about 50% in natural gas and renewables and 50% in liquids pipelines upon the expected closing of the transaction in 2024. It would also help Enbridge maintain its near-term and medium-term outlook as well as strengthen its long-term dividend-growth profile.
Dividend
Enbridge has paid dividends for about 70 years and increased its dividend for about 27 consecutive years. Through 2025, it expects to grow its DCF per share by about 3% per year, which should lead to similar dividend growth. Post 2025, it anticipates the DCF-per-share growth rate to bump up to approximately 5%, which could also boost the dividend growth.
Investor takeaway
At $45.77 per share, the blue-chip stock offers a high dividend yield of close to 7.8%. Its payout ratio in the first half of the year was sustainable at approximately 63% of the distributable cash flow. Analysts believe it trades at a good valuation, with the consensus 12-month price target suggesting a discount of 18%. With no valuation expansion, investors can approximate total returns of about 10.8% on a 7.8% dividend and 3% growth rate. So, it could be a good buy at current levels, especially as a partial position, for income-focused investors.
Price appreciation from valuation expansion could also be in the cards, but more patience may be needed. Typically, during recessions, the central banks would reduce the benchmark interest rates that should help lift the stock.
