Shares of TSX energy infrastructure giant Enbridge (TSX: ENB) are trading 22% below all-time highs, increasing its dividend yield to a tasty 7.6%. In recent months, Enbridge stock has trailed the broader markets due to rising interest rates, a sluggish macro economy, and its intention to acquire natural gas utilities from Dominion Energy for US$14 billion.
As share prices and dividend yields are inversely related, investors can benefit from a higher payout amid a broader market selloff. But you need to take a closer look at a company’s fundamentals to see if the dividend yield is sustainable across market cycles. So, let’s see if you should buy Enbridge stock for its high dividend yield today.
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Enbridge is a Dividend Aristocrat
While Enbridge is part of the cyclical energy sector, it has increased dividend distribution for 28 consecutive years. Armed with an investment-grade balance sheet and predictable cash flows, these payouts have risen by 10% annually since 1995. Due to its high dividend yield, ENB stock has returned over 800% to shareholders in the past two decades after adjusting for reinvestments.
Around 98% of the company’s earnings are derived from cost-of-service contracts or rate-regulated structures. It generates 50% of its earnings from the liquids pipelines business, 25% from gas transmission, 22% from gas distribution, and the rest from renewable energy.
Despite the capital-intensive nature of its business, Enbridge has a payout ratio of less than 70%, providing it with enough flexibility to lower balance sheet debt, increase dividends, and reinvest in growth projects.
In fact, Enbridge has a project backlog of $24 billion following the acquisition of gas utilities. These include offshore wind farms in Europe and expansions of its natural gas pipelines. These investments should enable Enbridge to increase earnings by 5% annually in the next few years.
Is Enbridge stock a good buy today?
Enbridge owns a diversified portfolio of cash-generating assets and is relatively immune to fluctuations in commodity prices, as a majority of earnings are derived from fees and long-term inflation-linked contracts.
This stability in cash flows allowed Enbridge to maintain and even increase dividends during the financial crisis of 2008 and the COVID-19 pandemic, showcasing the resiliency of its business model.
Once it acquires the assets from Dominion Energy, Enbridge will be the largest natural gas utility in North America. Further, around 25% of its earnings before interest, tax, depreciation, and amortization will come via non-midstream assets.
Enbridge ended the second quarter of 2023 with $1.3 billion in cash, so it would finance the acquisitions by raising additional debt. However, the company expects to maintain a leverage ratio of less than five, which is within its target range.
Priced at 16 times forward earnings, ENB stock is reasonably valued, given its high dividend yield and earnings growth estimates. Analysts tracking ENB stock expect it to gain over 20%, given consensus price target estimates. After adjusting for dividends, total returns may be closer to 30%.
Out of the 16 analysts covering Enbridge, nine recommend “buy” and seven recommend “hold.” There are no sell recommendations for Enbridge stock on Bay Street.
