Enbridge (TSX:ENB) is one of the popular stocks on the TSX. The Canada-based energy giant has returned 724% to shareholders in the last 20 years after adjusting for dividends. In this period, the TSX index has gained 354% in dividend-adjusted gains.
ENB stock currently trades 35% below all-time highs, increasing the company’s dividend yield to a tasty 8.2%. Let’s see if this beaten-down blue-chip TSX stock is a good buy right now.
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Is Enbridge stock a buy, sell, or hold?
Enbridge is a diversified energy infrastructure company valued at a market cap of $91.6 billion. Its core business segments include liquids pipelines, natural gas pipelines, gas utilities, and storage and renewable energy.
Enbridge transports 30% of the crude oil produced in North America and 20% of the natural gas consumed in the United States. In terms of customer base, it operates the third-largest natural gas utility in the continent. Enbridge is also investing heavily in the clean energy space and has a growing offshore wind portfolio.
Last month, Enbridge announced its intention to acquire three gas utilities from Dominion Energy, which will create the largest gas utility platform in North America. Once the acquisition is closed, Enbridge will deliver 9.3 billion cubic feet/day (bcf/d) of natural gas to seven million customers.
The all-cash transaction is valued at a purchase price of $19 billion, which includes $6 billion of assumed debt. Investors are wary about the deal given recent interest rate hikes, which might increase the cost of debt significantly for Enbridge in the near term.
However, Enbridge expects the acquisition to accelerate the scale of its existing low-risk utility model while improving cash flows and supporting its long-term dividend-growth profile.
Enbridge explains the acquisition multiple is attractive at 16.5 times forward earnings, which will deliver shareholder value. The acquisition is expected to be accretive to distributable cash flow per share and adjusted earnings per share in the first full year of ownership.
Once the acquisition is complete, around 50% of Enbridge’s EBITDA (earnings before interest, tax, depreciation, and amortization) will be derived from natural gas and renewables. This should enhance the company’s commercial profile with increased regulated cash flow.
Further, 98% of its cash flow will be generated from low-risk businesses, making Enbridge the only major pipeline and midstream company with regulated utility cash flow.
What is the target price for ENB stock?
Enbridge has a proven investment track record, increasing its adjusted EBITDA from $2.5 billion in 2008 to $15.5 billion in 2022. Despite a challenging macro environment, it is forecast to end 2023 with EBITDA between $15.9 billion and $16.5 billion.
Comparatively, its dividend has risen from $0.66 per share in 2008 to $3.55 per share in 2023, indicating an annual growth rate of almost 12%.
Despite the cyclical nature of the energy sector, Enbridge is relatively immune to fluctuations in commodity prices. Around 98% of its cash flows are tied to long-term contracts, while 95% of its customers are armed with investment-grade balance sheets. Further, 80% of its EBITDA has inflation-linked protections, allowing the company to generate cash flows across market cycles.
Priced at 15 times forward earnings, ENB stock trades at a discount of 33% to consensus price target estimates.
