On Tuesday, Federal Reserve Governor Christopher Waller indicated that the Federal Reserve could cut its benchmark interest rate slower than Wall Street’s expectations. Following Waller’s comments, the S&P/TSX Composite Index fell by 0.5%. Further, I expect the equity markets to remain volatile this year amid the expectation of a global economic slowdown due to the impact of monetary tightening initiatives.
Given the uncertain outlook, investors should look to strengthen their portfolios through quality dividend stocks that generate stable cash flows and possess an excellent track record of dividend growth. Meanwhile, Enbridge (TSX:ENB) has been paying dividends uninterruptedly for 69 years and has also increased its dividends for the last 29 years at a CAGR (compound annual growth rate) of 10%. So, let’s assess whether it would be an ideal buy in this environment by looking at its underlying business, recent performance, and growth prospects.
Enbridge’s 2023 performance
Enbridge is a diversified energy company transporting oil and natural gas across North America. Besides, it has exposure to natural gas utility, storage, and renewable energy businesses. It earns around 98% of its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) from cost-to-service and contracted assets, making its financials less susceptible to economic cycles. Further, around 80% of its adjusted EBITDA is inflation-indexed, thus shielding its financials against rising prices.
Enbridge generated an adjusted EBITDA of $3.9 billion in the recently reported third-quarter earnings, representing a 3% increase from the previous year. Growth in its liquid pipeline and renewable power generation segments more than offset a decline in gas transmission, and midstream and gas distribution and storage segments to drive its adjusted EBITDA. The company also generated distributable cash flows of $2.6 billion, a 2.9% increase from the previous year’s quarter. Now, let’s look at its growth prospects.
Enbridge’s growth prospects
Enbridge has signed separate agreements to acquire three U.S. utility companies from Dominion Energy for $14 billion. The acquisitions are accretive to the company’s DCFPS ( distributable cash flows per share) and adjusted EPS (earnings per share). Meanwhile, the increased contribution from high-quality utility businesses could further stabilize its cash flows. The company’s management hopes to complete these acquisitions by the end of this year.
Meanwhile, the company has provided its 2024 guidance, with its adjusted EBITDA to come in between $16.6 billion and $17.2 billion and DCF/share between $5.40 and $5.80. The midpoint of the guidance represents year-over-year growth of 4.3% and 2.8%, respectively. These guidances exclude the contribution from the proposed acquisition of gas utility facilities.
Further, Enbridge’s management has also provided optimistic near-to-medium-term guidance, with its DCF/share to grow at a CAGR of 3% through 2025 and 5% after that. Given its healthy growth prospects and solid liquidity of $20.4 billion, the company is well-positioned to maintain its dividend growth in the coming years.
Bottom line
Enbridge currently pays a quarterly dividend of $0.915/share, with a forward yield of 7.4%. Besides, its valuation also looks reasonable, with a forward price-to-earnings multiple at 17.8. Considering its solid underlying business, healthy growth prospects, attractive dividend yield, and cheaper valuation, I believe Enbridge would be an excellent buy in this volatile environment.
