Investors betting on the artificial intelligence (AI) boom have focused heavily on the makers of chips, computer servers, and cloud service providers, but the AI impact goes well beyond the tech sector and could bolster earnings in several other industries in the coming years.
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Enbridge
Enbridge (TSX:ENB) certainly isn’t the first name that comes to mind for most investors when they think about stocks that will benefit from the growth of AI. The company is widely known for its oil transmission infrastructure, but investments in recent years have focused on natural gas and renewable energy, and these are the businesses that could see a windfall from the expansion of AI data centres.
Computers that run AI programs consume massive amounts of energy. Governments and AI firms are quickly realizing that existing electricity generation and transmission networks might not be able to meet the demand surges, and quick fixes are not easy due to regulatory and political roadblocks. In the United States, for example, getting new electricity transmission infrastructure approved and built can take more than a decade due to the different jurisdictions and permitting offices involved in the process.
Data centre firms are increasingly looking to build independent on-site power generation capacity to ensure there is enough electricity available to run the AI operations. Renewable energy installations are the ideal source of supply. Companies are also looking at building power plants fuelled by natural gas. In many cases, the solution could be a combination of the two energy sources.
Enbridge is positioned well to benefit on both fronts. In 2022, the company acquired the third-largest American wind and solar developer, Tri Global Energy. On the natural gas side, Enbridge’s extensive transmission network moves 20% of the natural gas used in the United States, and its US$14 billion acquisition of three natural gas utilities in the United States this year will make Enbridge the largest natural gas utility operator in North America.
In addition, Enbridge is a partner in the Woodfibre liquified natural gas (LNG) export facility being built in British Columbia and is expanding its natural gas infrastructure to support LNG export sites in the United States. Demand for natural gas in both the domestic and international markets is expected to grow in the coming years due to the expansion of gas-fired power production to supply electricity for AI projects.
Enbridge trades near $53 at the time of writing. The stock is up about 10% in the past month and recently hit a new 12-month high. The tailwind is largely due to the recent cuts to interest rates in Canada and anticipated rate cuts in the United States. Enbridge uses debt to fund part of its growth program, including acquisitions and development projects. Lower borrowing costs will help the bottom line and should free up more cash for distributions.
Enbridge raised its 2024 guidance when it reported the second-quarter 2024 results. The current $24 billion capital program, along with contributions from new acquisitions, should drive ongoing cash flow growth in the 3% to 5% range in the next few years, even without an AI demand boost. This should enable steady annual dividend increases in a similar range.
Enbridge raised the dividend in each of the past 29 years. Investors who buy ENB stock at the current price can get a 6.9% dividend yield.
The bottom line on unconventional AI stocks
Enbridge is a good example of a stock that could benefit from the AI boom, but isn’t a supplier of tech gear and services. The growth outlook already looks solid for the company due to its current investments and the market doesn’t appear to be pricing in the potential AI upside over the coming years.
A near-term pullback should be expected given the extent of the recent rally, but ENB stock pays you well to ride out some market turbulence and deserves to be on your radar right now for a buy-and-hold portfolio.
