Oil prices have surged to around $100 a barrel as the conflict in the Middle East has intensified. When oil prices take off like this, energy stocks often get a boost as investors look for ways to benefit from higher commodity prices. But Enbridge (TSX: ENB) is a little different.
As one of North America’s major energy infrastructure companies, Enbridge generates much of its revenue through long-term, regulated contracts and fee-based services. Its pipelines and other infrastructure continue to transport oil and natural gas, providing relatively stable cash flows even when commodity prices are highly volatile.
So, while higher crude prices may create a positive backdrop for the energy sector, they aren’t necessarily the main reason investors buy Enbridge. The bigger attraction is the company’s relatively stable cash flow, defensive business model, solid dividend, and significant growth opportunity.
There’s another factor worth considering. Enbridge shares are now roughly 13% below their recent high. After that pullback, the stock looks attractive and provides a better entry point.
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Enbridge: A dependable income investment
Enbridge stock is a dependable income investment, largely because of its consistent dividend payments and impressive track record of dividend growth. The energy infrastructure company currently offers a dividend yield of more than 5.6%, supported by relatively stable cash flow, decades of dividend increases, and a resilient business model.
Enbridge has been paying dividends for more than 70 years and has increased its dividend every year since 1995. Its payout history reflects its commitment to returning cash to shareholders and the resilience of its earnings base.
Enbridge’s diverse revenue streams support its distributions. It operates across liquids pipelines, natural gas transmission and storage, utilities, and renewable power. This broad mix helps support steady earnings and distributable cash flow (DCF) while reducing the company’s dependence on any one business segment. It also gives Enbridge exposure to long-term energy demand across several parts of the sector.
Moreover, most of its earnings before interest, taxes, depreciation, and amortization (EBITDA) comes from regulated businesses or long-term contracts that include take-or-pay arrangements. In simple terms, these agreements help protect the company from swings in commodity prices. As a result, Enbridge can generate relatively stable cash flow even when oil and natural gas markets become volatile.
With its diversified operations and long history of growing earnings and DCF per share, Enbridge has a solid foundation for increasing the cash returns it provides to shareholders over time. The company also targets a dividend payout ratio of roughly 60% to 70% of DCF, giving it flexibility to continue funding its dividend while supporting the business long term.
Enbridge to deliver solid total returns
Enbridge appears well-positioned to continue creating value for shareholders through dividend increases and share price appreciation.
Enbridge’s medium- to long-term growth outlook is positive. ENB’s adjusted EBITDA, earnings per share, and DCF per share are projected to increase by about 5% annually. Growth from newly completed and upcoming projects, alongside ongoing strength in its core liquid pipelines, will likely support its share price and dividend.
Enbridge’s $39 billion backlog of secured capital projects is backed by regulatory mechanisms or long-term commercial agreements, reducing exposure to commodity-price volatility and providing considerable visibility into future earnings and cash generation. High utilization of its existing infrastructure should also help maintain stable and recurring cash flows.
Enbridge also stands to gain from several favourable industry trends, including rising electricity demand from data centres, increasing natural gas consumption, and ongoing investment in renewable energy infrastructure.
All these factors provide a solid foundation for continued earnings and cash-flow growth, positioning Enbridge to deliver solid total returns.
The bottom line
The rise in oil prices may improve sentiment toward energy stocks, but Enbridge’s investment case goes well beyond the commodity cycle. Its stable, largely contracted cash flows, strong dividend track record, and diversified infrastructure portfolio make it a relatively defensive way to gain exposure to the energy sector. With the stock still about 13% below its recent high, a yield above 5.6%, and a substantial pipeline of secured growth projects, Enbridge stock is still a buy.
