Why This 7 Percent Dividend Stock Surged Last Month

Despite the recent increases, Enbridge continues to trade at a cheaper valuation, making it an attractive buy.

| More on:
grow dividends

Image source: Getty Images

Global equity markets rose last month amid signs of inflation cooling down and the central banks’ pausing their interest rate hikes. The S&P/TSX Composite Index was up 7.2%. Meanwhile, Enbridge (TSX:ENB) outperformed the broader equity markets by rising 8.7% during this period.

Improvement in broader investors’ sentiments and its solid third-quarter performance drove the stock price of the midstream energy company. Despite the recent increase, it still trades around 4% lower for this year. So, let’s assess whether the stock is still a buy after its recent increases by looking at its recent performances and growth prospects.

Enbridge’s third-quarter performance

Despite the challenging macro environment, Enbridge reported an excellent third-quarter performance across its four segments earlier this month. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) rose 3% to $3.87 billion. Its increased economic interest in the Gray Oak Pipeline and the Cactus II Pipeline and higher volumes on the mainline, Gray Oak Pipeline, and Enbridge Ingleside Energy Center drove its financials.

However, the decline of economic interest in its DCP Midstream venture, lower commodity prices, and lower mainline toll prices offset some of the increases. Further, the company generated a distributable cash flow of $2.57 billion during the quarter. It closed the quarter with a liquidity of $20.4 billion, with its cash and cash equivalents at $2.67 billion. So, the company is well equipped to continue with its growth prospects.

Enbridge’s growth prospects

In September, the midstream energy company signed three separate agreements to acquire three natural gas utility assets in the United States for $19 billion. These acquisitions would double its gas utility business and increase the contribution from the segment to 22% of its EBITDA. With the increased contribution from the low-risk utility businesses, these acquisitions will lower business risks and improve the quality of its cash flows, thus making its future dividend payouts safer. The company’s management expects to close these acquisitions next year after receiving the regulatory approvals.

Meanwhile, the company continues its $24 billion secured capital program, with $3 billion spent in the first three quarters. These investments could expand its asset base while driving its financials in the coming years. Along with these initiatives, asset optimizations, increased toll prices, and secured organic growth could drive its financials in the coming years. The company’s management expects its EBITDA and EPS to grow at an annualized rate of 4-6% through 2025 and 5% after that. So, the company’s outlook looks healthy.

Dividend and valuation

Enbridge is one of the top dividend stocks to trade on TSX due to its excellent track record and consistent dividend growth. The company has been paying dividends uninterruptedly since 1954. Last month, the company raised its quarterly dividend by 3.1% to $0.915/share. It was the 29th consecutive increase, with its forward yield at 7.69%.

Enbridge’s valuation still looks reasonable, with its NTM (next 12-month) price-to-sales and NTM price-to-earnings multiples at 2.4 and 17.3, respectively.

Investors’ takeaway

Enbridge operates a highly capital-intensive business. So, the company has been under pressure over the last 18 months, as investors were worried that rising interest rates would increase its interest expenses, thus lowering its margins. With inflation showing signs of easing, few economists predict that the United States Federal Reserve could start slashing interest rates early next year. The decline in interest rates could lower its interest expenses, thus driving its profit margins.

So, considering the improving macro environment and its healthy growth prospects, high yield, and attractive valuation, I believe Enbridge would be an excellent buy right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Rajiv Nanjapla has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Question marks in a pile
Dividend Stocks

Where Will Brookfield Infrastructure Partners Stock Be in 5 Years?

Brookfield Infrastructure Partners (TSX:BIP.UN) kicked off 2024 with a bang. Where will it be in five years?

Read more »

Dividend Stocks

Golden Years Gain: Your CPP Benefits at Age 70

CPP users delaying pension payments until 70 will receive substantial monthly income streams in the golden years.

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Dividend Stocks

3 Dividend Stocks You Can Safely Hold for Decades

Top TSX dividend stocks are on sale.

Read more »

Dividend Stocks

Where Will Canadian Utilities Stock Be in 5 Years?

Canadian Utilities (TSX:CSU) is a classic example of a stock where the dividend is all you get. Can the company…

Read more »

Man holding magnifying glass over a document
Dividend Stocks

2 Stocks I’m Watching for Big Passive Income

Consider Bank of Nova Scotia (TSX:BNS) and another top passive-income play to power your dividend portfolio!

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

These top TSX stocks have increased their dividends annually for decades.

Read more »

bulb idea thinking
Dividend Stocks

2 Supercharged Dividend Stocks to Buy if There’s a Stock Market Sell-Off

These two top stocks offer attractive yields, have reliable operations and are dividend aristocrats, making them two of the best…

Read more »

question marks written reminders tickets
Dividend Stocks

Better Buy: Loblaw Companies or Metro Stock?

Loblaw Companies (TSX:L) stock is riding on recent momentum. Meanwhile, Metro (TSX:MRU) is executing for future earnings growth.

Read more »