Enbridge (TSX:ENB) owns a pipeline network transporting oil and natural gas across North America. It transports approximately 30% of crude oil produced in North America and 20% of the United States’ natural gas consumption. Besides, it has a strong presence in the utility business and renewable energy.
The company has been under pressure this year due to rising interest rates. Given its capital-intensive business, rising interest rates will raise its interest expenses, thus hurting its margins. So, the company, which has lost 3.8% of its stock value this year, has underperformed the broader equity markets. Meanwhile, let’s assess whether investors should utilize the correction to accumulate the stock to earn superior returns by looking at its third-quarter performance and growth prospects.
Enbridge’s earnings and outlook
Last month, Enbridge reported its third-quarter earnings, with its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) growing by 3% to $3.9 billion. Its increased economic interest in the Gray Oak Pipeline and Cactus II Pipeline facilities, and higher volumes on its Mainline, Gray Oak Pipeline and Enbridge Ingleside Energy Center drove its financials.
Further, the company has signed three separate agreements to acquire three natural gas utility assets in the United States for $19 billion. These acquisitions will add around 7 million customers across multiple regulatory jurisdictions and double the scale of its gas utility business. Further, it could increase its EBITDA contribution from the gas utility business to 22%. With the company already securing 75% of the required funds, it is looking at a combination of tools to raise the remaining amount while keeping its debt-to-EBITDA ratio within its guidance of 4.5 to 5.
Further, the company is progressing with $24 billion of secured capital and expects to put around $3 billion of facilities into service this year. Given its growth prospects, management expects its 2024 adjusted EBITDA to come in between $16.6 billion and $17.2 billion, with the midpoint representing a 4.3% increase from 2023 guidance. Meanwhile, management had earlier projected that its EBITDA and EPS (earnings per share) could grow 4–6% annually through 2025 and 5% after 2025. So, the business’ near-to-medium-term outlook looks healthy.
Dividends and valuation
With over 98% of its adjusted EBITDA generated from regulated assets or take-or-pay contracts, Enbridge’s financials are less susceptible to market volatility. Besides, inflation-indexed contracts will protect around 80% of its adjusted EBITDA from rising prices. So, the company generates stable cash flows irrespective of the market conditions, thus allowing it to raise dividends consistently.
Last month, ENB announced a 3.1% increase in its quarterly dividend to $0.915/share, marking the twenty-ninth year of a consecutive dividend hike. It currently offers a forward dividend yield of 7.71%. Further, the company trades at an attractive valuation amid the recent weakness. Its NTM (next 12 months) price-to-earnings multiple stands at 17.1, while its price-to-book multiple is at 1.7.
Investors’ takeaway
With a decline in construction spending and manufacturing, economists predict United States’ 2024 GDP (gross domestic product) growth will fall to 1.2% compared to 5.2% in the third quarter. So, the economic slowdown could turn equity markets volatile. Considering the uncertain outlook, Enbridge would be a healthy addition to your portfolio, given its stable cash flows, healthy dividend yield, and attractive valuation.
