Investing in pipeline companies is a good strategy for gaining exposure to the volatile and cyclical energy sector. With more than three million miles of pipelines in North America, pipeline companies are equipped to efficiently transport natural gas that powers industrial facilities, households, and businesses.
Canada has a couple of midstream companies that focus on owning and operating pipelines and related energy infrastructure. These companies are paid a fixed fee to allow energy producers to utilize the capacity of their pipeline systems, making them relatively immune to fluctuations in commodity prices.
Generally, pipeline operators derive a majority of their cash flows from long-term contracts that are indexed to inflation. This business model allows them to generate steady cash flows across business cycles.
Given these factors, let’s see if Canadians may consider investing in pipeline stocks such as Enbridge (TSX: ENB) and Pembina Pipeline (TSX: PPL) right now.
Image source: Getty Images
Should you invest in Enbridge stock?
Enbridge operates the largest and most complex crude oil and liquids transportation in the world. It moves 30% of all oil produced in North America and 20% of the natural gas consumed in the United States. Moreover, Enbridge is investing heavily in clean energy solutions showcased by its offshore wind energy facilities in Europe.
Enbridge’s predictable earnings allow it to pay shareholders an annual dividend of $3.66 per share, indicating a forward yield of 7.5%. Moreover, these payouts have risen at an annual rate of 10% on average since 1995, which is exceptional for a cyclical company.
Enbridge’s top-notch financial profile and investments in organic growth and acquisitions make it a solid investment choice for income-seeking investors in 2024. Despite a sluggish macro environment, Enbridge’s payout ratio was below 60% in the first quarter (Q1) of 2024, providing it with the flexibility to strengthen its balance sheet and further raise dividends. In the medium term, Enbridge aims to increase its dividends between 3% and 5% annually.
Priced at 16 times forward earnings, ENB stock trades at a discount of 12% to consensus price targets. So, if we adjust for dividends, cumulative returns may be closer to 20% in the next 12 months.
Is Pembina Pipeline stock a good buy?
Pembina Pipeline, valued at $30 billion by market cap, pays shareholders an annual dividend of $2.76 per share, indicating a yield of 5.4%. In Q1 of 2024, Pembina increased its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) by 10% to $1.044 billion.
In April, the company announced the completion of the Alliance and Aux Sable acquisition. The deal aligns with Pembina’s strategy of growing its existing franchise and providing exposure to resilient end-use markets and hydrocarbons.
Due to the acquisition, Pembina expects to end 2024 with EBITDA between $4.05 billion and $4.3 billion, an increase of $300 million compared to the previous guidance.
Pembina also announced it entered an agreement with Dow Chemical to supply and transport 50,000 barrels of ethane per day.
Priced at 15.9 times forward earnings, Pembina stock is quite cheap, given that its earnings are forecast to expand from $2.99 per share in 2023 to $3.39 per share in 2025. Analysts remain bullish and expect the TSX dividend stock to surge 8% in the next 12 months.
