Every now and then, you see a high-quality stock trading at a historically cheap valuation. In these situations, it’s tempting to buy. Usually, buying stocks at cheap valuations is better than buying high. In this article, I’ll explore a potentially magnificent dividend stock that might be worth buying near a once-a-decade valuation.
Enbridge
Enbridge (TSX:ENB) is a Canadian pipeline company that ships oil all over North America. It ships about 30% of the crude oil that is used in North America, making it an indispensable component of the North American economy. It also operates as a utility, supplying 75% of the natural gas used in Ontario. So, the company has diversified operations, meaning it can perform well under different market conditions.
Of interest to dividend investors is the company’s dividend yield. The stock yields 7.4% today, and the dividend has grown by 5.5% per year over the last five years. Rare for the company, the dividend-payout ratio is currently below 100%. That’s a positive because it indicates that the company can afford the dividends it’s paying out.
When I last wrote about Enbridge I gave it lukewarm coverage, arguing that it was dealing with legal issues that could result in enormous future costs. That was a real concern at the time. However, since then, the lawsuit has stalled out in court, and the company has returned to distributable positive cash flow and adjusted earnings growth after a brief period of declining earnings. Despite these positive developments, the stock trades at the lower end of its historical range.
The lawsuit
One concern I had about ENB stock when I last covered it was the lawsuit the company was facing at the time. Enbridge had been accused of routing its Line Five pipeline through unauthorized land. A judge sided with the plaintiffs and ordered Enbridge to reroute the pipeline, which would have cost the company a lot of money.
However, the case against Enbridge appears to have stalled out. The U.S. Federal appeals court was prepared to hear an appeal, but government lawyers argued for moving the case to State Court. Nothing has happened since then. All this legal wrangling doesn’t mean that Enbridge will never have to reroute the pipeline, but it does buy the company time. That will improve profitability for a few quarters — maybe even years.
A relatively cheap valuation
Enbridge stock has gone basically nowhere over the last five years. It’s been a bad time for shareholders who bought in the past, but the flipside of it is that the stock has a cheaper valuation today than in the past. At today’s prices, Enbridge trades at the following:
- 17.15 times earnings
- 16.9 times the best estimate of next year’s earnings
- 2.4 times sales
- 1.8 times book value
These multiples are relatively low compared to the levels ENB stock traded at in the past. So, now might be a good time to buy the stock.
Foolish takeaway
I’ve been pretty skeptical of Enbridge most of the time I’ve been covering it. I always thought it paid out too much profit as dividends and had intermittently negative cash flows. I’m still not buying the stock today, but it does have a sub-100% payout ratio and positive free cash flow now. It seems like it’s in a relatively good place by historical standards.
