Enbridge (TSX:ENB) has long been a dividend darling for Canadian investors, consistently offering a strong yield that keeps passive income enthusiasts coming back for more. However, while Enbridge stock remains a heavyweight in the energy sector, recent developments suggest it carries more risk than meets the eye.
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The risks
Enbridge stock’s recent third-quarter 2024 earnings highlight its impressive growth. The company reported profits of $1.29 billion, more than doubling from the previous year’s $532 million, thanks to contributions from its U.S. gas acquisitions and steady organic growth. However, on an adjusted basis, Enbridge’s profit was $0.55 per share, falling short of analysts’ expectations of $0.56. While this slight miss isn’t a cause for alarm, the higher financing costs associated with its acquisitions do raise eyebrows.
The biggest concern is Enbridge stock’s growing debt. Its $14 billion purchase of three Dominion Energy utilities, including debt, has significantly increased its leverage. While these acquisitions add valuable infrastructure and revenue potential, they also hike interest expenses. With interest rates still elevated, this financial strain could weigh on the company’s profitability and dividend stability in the future.
Future outlook
Looking ahead, Enbridge stock’s growth projects are ambitious but costly. Initiatives like the $1.1 billion Sequoia Solar project in Texas and the $700 million Canyon System Pipelines project on the U.S. Gulf Coast are designed to secure future growth. However, the need for significant capital investment means the company must balance growth aspirations with maintaining a healthy balance sheet — a tricky act in the current economic climate.
Enbridge stock has maintained a strong track record of dividend increases, raising its payout for 28 consecutive years, including a 3.2% hike in 2023. However, the sustainability of these increases is under scrutiny, given the company’s mounting debt and rising capital expenditure. While the dividend yield remains attractive, it’s crucial for investors to weigh the risks alongside the rewards.
Consider Canadian Utilities
Canadian Utilities (TSX:CU), by comparison, offers a more stable and conservative option for dividend seekers. The company reported adjusted earnings of $596 million in 2023, a modest decline from $655 million in 2022. This stability reflects CU’s focus on its core utilities business. This provides a steady and predictable cash flow — an essential ingredient for reliable dividends.
CU’s approach to growth is disciplined and aligns with its expertise. The company’s major project, the Yellowhead Mainline expansion in Alberta, is expected to cost over $2 billion. Unlike Enbridge stock’s broad forays into solar and pipelines, CU is doubling down on its core natural gas infrastructure, enhancing the efficiency of Alberta’s natural gas network. This focus ensures that CU remains within its financial comfort zone while still pursuing meaningful growth.
Future focus
Canadian Utilities boasts an unrivalled dividend track record, with 52 consecutive years of annual dividend increases. The longest of any publicly traded Canadian company. This unmatched consistency underscores the company’s commitment to rewarding its shareholders, all while maintaining a cautious and balanced approach to its finances.
Looking forward, CU’s strategy revolves around incremental growth, cost efficiency, and capital discipline. While this might seem less exciting compared to Enbridge stock’s bold expansion plans, it’s a safer bet for risk-averse investors seeking steady income. Moreover, CU’s exposure to regulated utilities offers a level of insulation from the volatility often seen in the broader energy sector.
Bottom line
When comparing the two, the decision boils down to risk versus reliability. Enbridge stock’s large-scale projects and acquisitions offer the promise of future growth but come with significant financial risk. Its growing debt and reliance on capital-intensive projects could strain its ability to maintain its enviable dividend track record. Meanwhile, CU’s steady earnings, conservative growth plans, and unparalleled dividend history make it a more dependable option for those prioritizing stability.
In the current market environment, where economic uncertainty and high interest rates persist, investors need to consider the risks associated with their dividend stocks. Enbridge stock remains a tempting choice for those who can stomach some risk, but Canadian Utilities provides a peace-of-mind factor that’s hard to overlook. For investors looking to build a resilient passive income portfolio, CU is the safer and smarter pick.
