Enbridge Inc (TSX: ENB) has been one of Canada’s best performing energy stocks over the last five years. It has risen 109% in price in that timeframe; it started off the timeframe with a 7% dividend yield and has increased the dividend by a 3.1% CAGR over the period. Therefore, it has delivered a 164% total return in five years. Nice!
So, Enbridge has been on a great run lately. It’s way up in the markets and paying rising dividends. Furthermore, as I’ll show momentarily, the price increases appear to have been supported by improved fundamentals.
Enbridge has been a winner lately. That doesn’t mean that it’s going to be a winner forever though. In this article, I’ll explore where I see Enbridge going in the next three years.
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Fundamentals: Slow and steady growth
I’d expect slow, steady, and positive growth from Enbridge in the next three years. There are a few reasons for this:
- Enbridge operates on a landlord-like model. Its clients sign on to rent out space in its pipelines for periods of 10–20 years. Even if oil prices drop, Enbridge’s money keeps coming in.
- The current oil & gas market is pretty healthy, and that could help Enbridge gain more toll-paying clients.
- While Trump has tariffed Canadian goods, energy is tariffed less than other things, and I’m not even sure it’s tariffed anymore after the Supreme Court’s recent decision on Trump tariffs (SCOTUS blocked the tariffs, but Trump started re-implementing them using different legal routes).
One thing is certain: Enbridge has been doing a lot of growing in the last three years. In the trailing 12 month (TTM) period, its revenue was up 13% and earnings up 9%. Over the last three years, earnings compounded at a 35% CAGR. That’s pretty impressive growth, though it was preceded by little to negative growth in earlier periods. Over the last 10 years, Enbridge’s earnings are up only 4.5% CAGR. This is about the rate of growth I’d expect over the next three years.
Stock performance: Harder to say
As for the performance of Enbridge’s stock, that’s hard to say. The stock currently trades at 25 times earnings. This is a little pricey for a typical pipeline stock, and as I wrote above, I’m expecting the earnings growth rate to mean-revert. The actual return investors get over the next three years, probably won’t match what they got over the last three. Nevertheless ENB’s dividend yield is quite high and while the payout ratio is above 100%, the company has had payout ratios above 100% for practically its entire history and it has never been a problem. I think the company may be pushing it a little with dividends, but I don’t think dividend payouts will crush the company over the next three years, or anything like that. I think returns will just be a little underwhelming.
Foolish takeaway
Taking everything above into account, I have decided not to invest in Enbridge stock. I think it has run up enough already and is too pricey relative to its growth potential. Furthermore, I find its history of consistently above-100% payout ratios concerning. Over the next three years, I’d expect investors to collect the dividend but not much else.
