Enbridge (TSX:ENB) is one of North America’s largest pipeline (energy infrastructure) companies. Indeed, Enbridge is best known for its extensive pipeline network transporting crude oil and natural gas.
There are good reasons why many investors view Enbridge as a stable dividend stock worth owning over the long term. But where will Enbridge stock be in five years?
Let’s dive into some of the growth drivers and downside risks investors may want to consider when it comes to this pipeline player.
Reliant business model leading to strong dividend growth
In terms of positive catalysts for Enbridge over the long term, there’s a lot to like about the company’s stable, fee-based revenue model. Providing transportation services for oil and natural gas from where it’s produced to where it’s refined is a relatively capital-intensive process, but one that provides relatively stable cash flow streams for decades. Investors in Enbridge stock have benefited from these long-term trends, and are now raking in a dividend yield of 5.9%.
This yield has actually come down as Enbridge’s stock price has performed very well over the past five years (and past year in particular). For those looking to invest in the energy sector, Enbridge provides about the most defensive exposure high-yielding stocks can provide to this space. And as the company transitions some of its portfolio toward renewables, there’s a growth element to this story that’s worth considering.
There are certainly risks, though
In terms of downside risks investors may want to consider when it comes to Enbridge, it’s important to address the elephant in the room first. If the U.S. stops buying as much Canadian oil as it has in the past, and begins switching its refining capacity toward lighter, sweet crude produced in the U.S., Canadian oil sands product (which is highly viscous and needs to be diluted) could see demand plummet.
That’s an outside risk, based on how the U.S. refinery system is currently set up. But it’s one that could be a massive headwind for Enbridge, particularly if something gets announced on this front.
Then there’s the extensive amount of capital needed to maintain and expand the company’s pipeline network (which may actually be possible, if Pierre Poilievre wins the election later this year). Growth expectations will pick up, but so too will the company’s debt load. Investors looking for pristine balance sheets may look elsewhere.
So, what will the next five years bring?
I’m expecting to see a shift in government take place in Canada, as it has throughout the world, in short order. The market seems to expect something similar, and that’s a key reason why Enbridge’s share price has moved like it has.
That said, I do think there are plenty of potential headwinds that could arise in the coming years and derail an otherwise positive story around this energy infrastructure giant. For now, I’m very bullish on where Enbridge is headed over the next five years. But we’ll just have to see what transpires over the course of this coming election cycle first.
