Enbridge (TSX:ENB) has been underperforming the TSX Composite Index for a long time. Up 19.54% over five years, it has trailed the index by about 22%. The stock does have a pretty high dividend yield, but the index has some yield as well. Taking dividends into account, it’s still behind the TSX by about 0.17%.
In the last year, ENB’s performance improved considerably. It rose 21% in the trailing 12-month period, considerably more than the TSX index in the same timeframe. The stock’s rally coincided with a second-quarter earnings release that showed the company’s revenue rising 8.7%. That was a major positive because the company’s revenue had been depressed throughout 2023. Normally, you think of a pipeline as a kind of “royalty,” a company whose sales are pretty much locked in and whose entire profit picture depends mainly on prudent expense management. It was alarming to see Enbridge’s revenue decline in 2023, so last quarter’s recovery was a major positive.
Payout ratio improving
Another thing that’s been improving at Enbridge is its payout ratio. A stock’s payout ratio is dividends divided by earnings — it’s a measure of dividend sustainability. For the longest time, ENB’s payout ratio was above 100% — a level that indicates issues with sustainability. That was a major point made by those who were bearish about the stock for the longest time. I myself highlighted it as a risk factor in past articles.
However, Enbridge’s management largely cooled it with the big dividend increases that were causing these payout ratio issues. Over the last two years, they hiked the dividend by only 3% per year. As a result, ENB now has a 95% payout ratio, which is a little on the high side but better than before. Also, despite the slowing dividend growth, Enbridge still has a 6.9% dividend yield, which is among the highest of all large-cap TSX stocks.
Oil market doing relatively well
Another thing that Enbridge has going for it is a healthy oil market. Over the last few years, oil has gone up and down but has mostly remained comfortably above the $50-$60 range that defined the 2014-2020 period. Those years were very weak ones for the oil and gas industry, as a supply glut in the early 2010s led to a depressed market. Since then, oil has come back swinging, and with OPEC still keeping supply at a relatively low level, we should see relatively high prices in the near term. This bodes well for Enbridge’s customers, who are able to stay in business and keep paying their long-term fees.
Foolish takeaway
On the whole, I’m inclined to think that Enbridge’s future is better than its recent past. The stock thrived in the 1990s and 2000s when the oil market was healthier than it was in the 2010s. Today, it has the chance to do the same. Of course, there are always risk factors. Widespread renewables deployment could reduce demand for oil and natural gas, and competitors building new pipelines could potentially take business from Enbridge. But for now, the sailing appears smooth.
