This year has been weak for energy infrastructure and utility companies, as they have significant debt on their balance sheets. But in this bearishness lies an opportunity to lock in a 7.6% dividend yield. Even banks don’t give such high interest on deposits. A 7.6% yield can help you beat inflation and boost returns. If you have been investing a small amount every month in building a passive-income portfolio, a 7.6% dividend yield can give it a boost. The stock giving such a high yield is North America’s largest pipeline operator, Enbridge (TSX:ENB).
Enbridge stock falls to its three-year low
After a windfall year in 2022, when oil and gas prices skyrocketed due to the Russia-Ukraine invasion, Enbridge (TSX:ENB) did not accelerate its dividend growth. Instead, it used that money to build new natural gas pipelines as it looked to tap the North American liquified natural gas export market. In its quest to transition to low-carbon energy, Enbridge announced the acquisition of Dominion Energy’s three gas utility operations — EOG, Questar, and PSNC — for US$9.4 billion cash.
The news pulled Enbridge stock to its 52-week low below $45. The dip came as the deal will see cash outflow at a time when short-term cash has immense value, since high interest rates have made borrowing expensive.
It is a ripe time to take long-term loans, as interest rates will fall in two to three years. Interest rates above 5% are not sustainable in the long term as it cripples economic growth. The central bank is increasing rates to control inflation. Once that is controlled, it may cut rates to boost economic growth.
The U.S. Fed hinted that it could maintain rates above 5% till the end of 2024 and gradually ease rates in 2025 and 2026. By the time Enbridge expects to complete the acquisition (towards the end of 2024), a mild recession would have occurred, and rate easing would likely be the central bank’s priority. Even though Enbridge stock took a hit due to short-term weakness, its long-term prospects are strong.
A no-brainer stock to buy and hold for decades
The last time Enbridge stock fell below $47 was in 2020, and many regretted not buying it then. A +7% yield is rare for a Dividend Aristocrat with a 68-year record of paying regular dividends. Moreover, it has grown dividends at a compounded annual growth rate of 10% over the last 28 years.
But Enbridge cannot sustain this dividend momentum with oil, which accounts for 57% of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Hence, it decided to accelerate its transition to gas with the above acquisition. The acquisition will balance Enbridge’s earnings mix to 50% oil and 50% natural gas and renewables.
Once completed, the acquisition is expected to be accretive to Enbridge’s distributable cash flow (DCF) and adjusted earnings per share. It means Enbridge can continue paying a $3.55 dividend per share. Moreover, the acquisition will increase the DCF over time, strengthening its dividend-growth profile. As for funding the acquisition, Enbridge expects to maintain its debt at 4.5-5.0 times its adjusted EBITDA. It is a comfortable ratio for Enbridge to serve its debt, invest in building pipelines, and pay incremental dividends.
Looking at the above fundamentals, the acquisition will enhance Enbridge’s low-risk business model. It has made a gas utility acquisition early as oil is likely to decelerate by the end of the decade. Even TC Pipelines is spinning off its oil pipeline business as it is becoming difficult to make new oil pipelines. Any revenue growth will come from the maintenance of existing pipelines.
What does a 7.6% yield mean to your passive-income portfolio?
If you invested $5,000 annually in Enbridge at an average stock price of $51, you have locked in $348 in annual dividends. But if you invest $5,000 now, you can lock in $379.8 in annual dividends. It is an opportune time to get an extra $31 in annual dividends.