With the tailwinds the energy sector has experienced lately and the increasing demand for higher-quality and reliable dividend stocks in this environment – and after interest rates started to fall last year – Enbridge (TSX:ENB) has been on a significant rally as of late.
In fact, the stock is now trading at nearly $80 and just 5% below its all-time high, putting it near some of the highest levels investors have ever seen. That’s great news for long-term shareholders. However, it also raises an important question for investors considering buying today.
Though while Enbridge remains one of the highest-quality dividend stocks on the TSX, that doesn’t necessarily mean it’s automatically worth buying at its current price.
In fact, the stock is trading at a premium to its historical valuation, which can create even more confusion for investors, especially because the business itself still looks as attractive as ever.
So, let’s look at just how expensive Enbridge stock is relative to its historical value and whether it’s worth buying today.
Source: Getty Images
Why Enbridge is still a strong long-term stock
There’s a reason Enbridge continues to be one of the most widely owned dividend stocks in Canada.
The company operates one of the largest energy infrastructure networks in North America, moving massive amounts of oil and natural gas across the continent every day. These assets are essential to the energy system and generate highly predictable cash flow regardless of short-term commodity price fluctuations.
That stability is one of the biggest reasons investors continue to own the stock for years, and often decades.
Enbridge also benefits from a largely fee-based business model, which helps reduce volatility and provides reliable earnings. As a result, the company has been able to consistently return cash to shareholders while continuing to invest in future growth projects.
Of course, income remains a major part of the story as well. Not only is Enbridge well-known to be a stock that pays an attractive yield, but it’s also well known as one of the best and most consistent dividend growth stocks on the TSX, with over three decades of consistent annual increases.
Why valuation matters right now
The challenge for investors today isn’t the quality of the business; it’s the price they’re being asked to pay for it.
Currently, Enbridge trades at an enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio of roughly 13.7 times. That’s noticeably higher than its historical averages of 12.8 times over the last year, 12.2 times over the last five years, and 12.5 times over the last decade.
Furthermore, while the stock offers a yield of 5.1% today, which looks attractive on the surface, it’s considerably lower than its historical averages of 5.7% over the last year, 6.6% over the last five years, and 6.4% over the last decade.
So, there’s no question that the stock is trading well above its historical averages in the current environment.
However, with that said, it doesn’t automatically mean investors should avoid the stock or wait indefinitely for a correction. Trying to perfectly time a pullback is often easier said than done, and high-quality businesses can trade above their fair value for years, especially in economic environments with higher uncertainty.
That’s especially true for companies like Enbridge, where strong fundamentals and reliable income can keep demand for the stock elevated for long periods of time.
The Foolish takeaway
At the end of the day, Enbridge is still one of the best dividend stocks on the TSX to own as a long-term investment.
The business remains highly defensive, continues to generate reliable cash flow, and offers an attractive dividend backed by essential infrastructure assets.
However, with the stock trading near its highs and valuation metrics sitting above historical averages, it certainly isn’t cheap.
That’s why, although I’d avoid aggressively buying shares at current levels, a more practical approach to consider may be to build a position gradually over time.
So, while Enbridge is still worth owning long term, right now it’s a stock you’re better off adding to on pullbacks or building into over time instead of buying at current levels.
