It’s been an incredible run for shares of pipeline juggernaut Enbridge (TSX:ENB) in the past couple of years, but, more recently, the name has begun to take a bit of a breather. Now down close to 10% from its all-time highs, investors might be wondering if this is a window to buy the dip or a signal to take profits before sell-side analysts have a chance to turn their backs.
Of course, the long-term narrative is still intact, and the long-term project pipeline (please forgive the pun!) looks as sound as ever. At the same time, you’re paying quite a rich multiple for the $158 billion titan, with shares currently hovering at just a hair over 28.0 times trailing price-to-earnings (P/E). That’s not just expensive for Enbridge standards, but it’s close to the highest it’s been in recent memory.
Any way you look at it, there seems to be a lot baked into the current price of admission, even after the latest correction. Even if the Canadian midstream energy leader does go for a bit of a rich premium, the 5.1% dividend yield is still very bountiful, especially in an environment where quality, growing high-yield dividends are becoming more scarce.
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Is the Mainline expansion pause anything to be worried about?
With the firm recently pulling back a bit on the second phase of its Mainline oil pipeline expansion by hitting the pause button so that producers have a chance to catch up, questions linger as to whether the move represents the start of a trend or whether it’s just an act of prudence on the part of management.
In my humble opinion, it’s the latter. The management team is not only shareholder-friendly with all the dividend raises through the years, even in the tough years, but they’re also quite shrewd when it comes to how they allocate capital.
Sure, the company could spend first and let demand come online, but I’d argue that waiting a bit to see where producer commitments go is the best move. At the end of the day, you cannot fault management for exercising capital discipline. And, in my view, the long-term tailwinds are still very much intact as Enbridge does its part to build the energy transportation infrastructure that is still very much necessary.
A tough downgrade
Combined with the recent downgrade from outperform to market perform (pretty much the equivalent of a hold rating) courtesy of Raymond James, it feels like an uneasy time to be a net buyer of ENB stock.
If anything, things feel toppy, and with shares still up 10% year to date, there’s really no telling how vicious a valuation reset could be for the firm now that there’s a bit of concerning news for a change when it comes to the firm that seemingly only had the wind to its back in the past year.
The bottom line
While a 28 times trailing P/E might be a tad rich, I do think that investors tempted by the yield might wish to start nibbling their way into a position starting today, perhaps extending into the fourth quarter if this is the big drop that Enbridge has been overdue for. In short, ENB stock now has an overhang, but, for the most part, the fundamentals are still very much sound.
