Canada’s Pipeline Powerhouse: Is Enbridge’s Yield Too Good to Ignore?

Enbridge generates stable cash flows to support a safe and high dividend yield, which could appeal to income investors.

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Enbridge (TSX:ENB) is Canada’s pipeline powerhouse. The energy infrastructure company is one of the largest in North America, with a market cap of over $100 billion. It consists of four key franchises: liquids pipelines, gas distribution, gas transmission and midstream, and renewables.

It’s sort of like a utility with a low-risk profile. The pipeline operator has demonstrated its ability to generate resilient cash flows through the market cycle. For instance, through the global financial crisis of 2007–08, the commodity price collapse in 2014, and the COVID pandemic year of 2020, its cash flows were either stable or growing.

Notably, its diversified cash flow streams are primarily contracted or under cost-of-service regulation and come from investment-grade customers. Furthermore, about 80% of its cash flows have inflation protection.

Is Enbridge stock’s yield too good to ignore?

Enbridge is one of the top dividend stocks on the TSX. It has a stellar dividend-paying track record. In fact, it has paid out common stock dividends for about 70 years and increased this dividend for approximately 27 consecutive years. Its 10-, 15-, and 20-year dividend growth rates are 11–12%. However, you’ll notice that its more recent dividend increases have been lower. For example, one-, three-, and five-year dividend growth rates are about 3%, 5%, and 7%, respectively.

As the company has matured, its dividend growth has declined, but its dividend yield has climbed higher. For example, 20 years ago, investors would have bought the stock at a yield of about 3.8%. Today, the blue chip stock offers a much bigger dividend. At $47.37 per share at writing, ENB provides an eye-popping dividend yield of 7.7%, which is hard to beat.

Enbridge’s year-to-date payout ratio is sustainable at approximately 66% of its distributable cash flow, which is the metric management uses to assess the company performance and set its dividend payout target.

So, Enbridge stock is a good consideration for investors who need current income, as long as you can accept the lower dividend growth, which will, at worst, be around 3%.

Recent results and outlook

So far, Enbridge has reported results up to the third quarter of this year. Year to date, its adjusted EBITDA, a cash flow proxy, has increased by 6.3% to $12.3 billion, while its distributable cash flow increased by 2.6% to $8.5 billion. Management doesn’t expect any surprises for the fourth quarter. The company also anticipates its debt-to-EBITDA ratio to be below its target range of 4.5 to 5 times. As well, Enbridge earns an investment-grade S&P credit rating of BBB+.

Enbridge also provided its 2024 financial guidance at the end of November. Specifically, the top energy stock anticipates adjusted EBITDA growth of approximately 4% to $16.6–$17.2 billion, distributable cash flow per share growth of about 3% to $5.40–$5.80, and dividend growth of about 3% to $3.66. Thanks to gas utility assets acquired that Enbridge expects to be accretive to its distributable cash flow per share in 2025, its dividend growth could improve to about 5% then.

According to TMX, the recent 12-month consensus analyst price target of $50.48 per share suggests the stock is fairly valued. Assuming no price appreciation and a 3% growth rate, investors can approximate long-term total returns of about 10.7%.

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 Kay Ng has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge and TMX Group. The Motley Fool has a disclosure policy.

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