Amid the hopes of interest rate cuts by the Federal Reserve of the United States, the Canadian equity markets are witnessing a solid upward momentum, with the S&P/TSX Composite Index closing above 28,000 on Thursday. Year to date, the index is up around 13.5%. Meanwhile, Enbridge (TSX: ENB) has outperformed the benchmark index this year by delivering a return of around 14.3%. Let’s examine its historical performances and growth prospects to determine buying opportunities in the stock for income-seeking investors.
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Enbridge’s historical performances
Enbridge operates pipeline networks to transport oil and natural gas across North America. It has adopted a tolling framework and long-term take-or-pay contracts to transport crude oil and natural gas, thereby enhancing the company’s financial stability. Additionally, the company operates three natural gas utility assets in the United States, serving three million customers across five states. It also operates 38 renewable energy assets with a combined power production capacity of 7.2 gigawatts. It sells most of the power produced from these facilities through long-term PPAs (power-purchase agreements).
The diversified energy infrastructure company earns around 98% of its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) from regulated assets and long-term contracts. Also, less than 1% of its EBITDA is susceptible to commodity price fluctuations, and around 80% of its EBITDA is inflation-indexed. Given its highly regulated business, the company has posted stable and reliable financials. Supported by these reliable financials, the company has delivered an average total shareholders’ return of 12% for the last 20 years. Moreover, it has paid dividends uninterruptedly for 70 years and has also increased its dividend at a 9% CAGR (compound annual growth rate) since 1995. Currently, its forward dividend yield stands at a healthy 5.65%.
Enbridge’s growth prospects
The global energy demand is rising amid population growth, rising living standards, and rapid urbanization. Meanwhile, the IEA (International Energy Agency) predicts global energy demand to double by 2050, thereby driving the demand for Enbridge’s services. Meanwhile, the Calgary-based diversified energy company has identified $50 billion of growth opportunities across its segments for the rest of this decade. It plans to invest $9-$10 billion annually to expand its asset base and benefit from these growth opportunities. Additionally, in May, the company acquired a 10% stake in Matterhorn Express Pipeline.
Amid these growth initiatives, Enbridge’s management projects its adjusted EBITDA and adjusted EPS (earnings per share) to grow at an annualized rate of 7-9% and 4-6% through 2026. Thereafter, the management expects its EBITDA and EPS to grow at around 5% annually. The company has also strengthened its financial position by lowering its net debt-to-EBITDA multiple from five at the end of 2024 to 4.7. Considering its solid underlying businesses, healthy growth prospects, and improving financial position, I expect Enbridge to continue paying dividends at a healthier rate.
Investors’ takeaway
The Bank of Canada has cut interest rates seven times since April 2024, lowering its benchmark interest rate by 225 basis points to 2.75%. Economists predict more rate cuts in the coming quarters. Given its capital-intensive business, Enbridge could benefit from lower interest rates. Also, despite delivering healthy returns this year, the company’s next-12-month price-to-sales multiple stands at a reasonable 2.5, making it an attractive buy.
