Enbridge (TSX:ENB) is arguably among Canada’s most popular dividend stocks, and for good reason. The energy heavyweight has increased its dividend payouts by 10% annually (on average) in the last 29 years, showcasing the resiliency of its cash flows and business model. Today, valued at $108 billion by market cap, ENB stock trades 22% below all-time highs, allowing you to buy the dip and benefit from a tasty dividend yield of 7.1%. Let’s see why.
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An overview of Enbridge
Enbridge is a diversified energy infrastructure company with four primary business segments: liquids pipelines, natural gas pipelines, gas utilities and storage, and renewable energy. It transports around a third of the crude oil produced in North America and 20% of the natural gas consumed in the United States. Enbridge also operates North America’s largest natural gas utility by volume and is an early investor in renewable energy armed with a growing offshore wind portfolio.
The Canadian energy giant operates the world’s longest liquids transportation system that spans over 28,600 kilometres, and its natural gas pipelines connect supply to major population centres and liquified natural gas (LNG) export facilities. Moreover, Enbridge has 38 renewable energy projects (operating or under construction) that generate enough electricity to power more than one million homes.
A big-ticket acquisition
In late 2023, Enbridge announced plans to acquire three gas utilities from Dominion Energy. Once the acquisition is completed, it will create North America’s largest gas utility platform. The transaction was valued at $19 billion, which made investors nervous, given that Enbridge would have to significantly increase its balance sheet debt to complete the buyout.
However, according to Enbridge, it would gain access to quality assets at scale, delivering natural gas to seven million customers. The acquisition was valued at 16.5 times earnings, which is not too steep as Enbridge expects the deal to be accretive to distributable cash flow and earnings in its first full year of ownership.
Enbridge emphasized that the acquisition doubled the size of its utility business, which is fairly recession-resistant, and strengthened its long-term dividend-growth profile. It is also the only major pipeline and midstream company with a regulated utility cash flow.
Once the acquisition is complete, Enbridge will generate 50% of EBITDA (earnings before interest, tax, depreciation, and amortization) from natural gas and renewables.
Enbridge has a growing earnings base
Enbridge’s adjusted EBITDA increased from $14 billion in 2021 to $16.5 billion in 2023. Its distributable cash flow (DCF) per share rose from $4.96 in 2021 to $5.48 per share. Enbridge expects to end 2024 with an EBITDA between $16.6 billion and $17.2 billion, while DCF per share is forecast between $5.40 and $5.80.
Enbridge currently pays shareholders an annual dividend of $3.66 per share, indicating a sustainable payout ratio of 65% while providing the company with room to reinvest in growth projects, target acquisitions, and lower balance sheet debt. In 2024, Enbridge has allocated $7 billion to debt maturities, $5 billion to growth capital, and $7 billion to dividends.
Priced at nine times its future cash flows, ENB stock is quite cheap and is positioned to outperform the TSX index going forward.
