Shares of Canada-based energy infrastructure giant Enbridge (TSX:ENB) have been rangebound for more than 10 years. After adjusting for dividend reinvestments, ENB stock has returned 70.4% to shareholders since July 2014, much lower than the 104% gains generated by the TSX index.
Today, Enbridge stock trades 26% below all-time highs and pays shareholders an annual dividend of $3.66 per share, indicating a forward yield of 7.5%. In addition to its dividend yield, investors are also positioned to benefit from capital gains, increasing the cumulative returns over time. Let’s see why.
Is ENB stock a good buy right now?
Last September, Enbridge announced plans to acquire three U.S. natural gas utilities from Dominion Energy for $19 billion. The acquisition will create North America’s largest gas utility customers and be accretive to future cash flows and dividends.
For instance, the combined entity will deliver 9.3 Bcf/d (billion cubic feet) to seven million customers. The deal will allow Enbridge to accelerate the scale of its low-risk utility model, improve cash flow quality, and maintain balance sheet strength. Once the acquisition is complete, Enbridge will earn around 50% of its EBITDA (earnings before interest, tax, depreciation, and amortization) from natural gas and renewables. Additionally, 98% of its EBITDA is generated by low-risk businesses, making Enbridge the only major pipeline and midstream company with regulated utility cash flow.
While Enbridge has increased its balance sheet debt to fund the acquisition, it aims to maintain a debt-to-EBITDA ratio of less than five times. It is also focused on maintaining a dividend payout ratio of less than 70%, which provides Enbridge with the flexibility to reinvest in organic growth and acquisitions and increase dividends.
Enbridge has raised dividends by 10.3% over the last 10 years, enhancing the effective yield.
A strong performance in Q1 of 2024
Despite a challenging macro environment, Enbridge increased EBITDA by 11% year over year in the first quarter (Q1) of 2024. Its distributable cash flow per share increased by 4% to $1.63 while it paid a quarterly dividend of $0.915 per share, indicating a payout ratio of just 56%.
Enbridge completed the acquisition of Ohio Gas in Q1, which contributed to its EBITDA growth. Further, Enbridge emphasized strong asset performance across liquids, gas transmission, and renewables, which also drove EBITDA higher in the March quarter.
One main reason to invest in Enbridge stock is its predictable cash flow. It has virtually no exposure to commodity prices, as 98% of earnings are generated from cost of service or take-or-pay contracted assets. Around 80% of its EBITDA is earned from assets that are protected against inflation. Finally, it is hedged against interest rate volatility as less than 5% of its debt portfolio is exposed to floating rates.
Analysts tracking ENB stock expect adjusted earnings to grow by 7% year over year to $3 in 2024. So, priced at 16 times forward earnings, the TSX dividend stock is quite cheap and trades at a 12% discount to consensus price target estimates. After adjusting for its dividend, cumulative returns might be closer to 20% in the next 12 months.
