In addition to a company’s dividend yield, investors must analyze its fundamentals to gauge whether it can maintain these payouts across business cycles. The ideal dividend-paying company generates steady cash flows that allow it to reinvest in capital expenditures and acquisitions, lower balance sheet debt, and raise dividends each year.
One such TSX dividend stock is Enbridge (TSX:ENB), which offers shareholders a forward yield of 6.9%, given its annual payout of $3.66 per share.
Let’s see if Enbridge’s dividend yield is safe and sustainable right now.
Enbridge is a Dividend Aristocrat
Enbridge is among the most popular dividend stocks in Canada as it operates a diversified portfolio of cash-generating assets. Moreover, the majority of its cash flows are regulated and tied to inflation-linked long-term contracts, making the energy giant almost immune to commodity price fluctuations.
This cash flow visibility has allowed Enbridge to raise its dividends by 10% annually on average since 1995, significantly enhancing the yield at cost. Valued at $115 billion by market cap, ENB stock has returned 323% to shareholders in the last two decades. However, after adjusting for dividend reinvestments, cumulative returns are much closer to 950%.
A strong performance in Q2 of 2024
Last year, Enbridge announced plans to acquire three natural gas utilities from Dominion Energy for a whopping $19 billion. In the second quarter (Q2) of 2024, it closed the acquisition of Questar for US$4.3 billion, completing the acquisition of the second natural gas utility from Dominion. The Questar acquisition will improve Enbridge’s cash flow profile and help it gain traction in Utah, where the population growth is forecast at 5% annually through 2028.
Moreover, Enbridge filed a regulatory settlement and is on track to close the third and final utility acquisition in the current quarter, as it has completed the required financing to fund these deals. Once all three acquisitions are over, Enbridge will own and operate the largest gas utility franchise on the continent.
In Q2, Enbridge increased its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) by 8%, while distributable cash flow per share rose by 3% in the June quarter.
The oil and gas behemoth expects to end 2024 with adjusted EBITDA between $17.7 billion and $18.3 billion and distributable cash flow per share between $5.40 and $5.80, indicating a reasonable payout ratio of 65% at the midpoint estimate.
Similar to several other energy providers, Enbridge is well-positioned to benefit from the artificial intelligence megatrend. In its earnings release, Enbridge emphasized it is negotiating to connect around 200 megawatts (MW) of power to serve data centre customers in the near term.
Energy demand to power data centres might unlock another revenue stream for Enbridge, making it a top investment in 2024.
Is ENB stock undervalued?
Enbridge’s utility acquisitions should help it increase adjusted earnings from $2.79 per share in 2023 to $3.05 per share. These expansions are part of $24 billion of secured commercial projects and should help boost distributable cash flow and dividend hikes in the future.
Priced at 18.2 times forward earnings, ENB stock is not too expensive, given its tasty dividend yield and steady earnings growth.
