It’s been a rather unimpressive year so far for shares of Enbridge (TSX: ENB), which are now down close to a percentage point after big gains from the first half of the year were wiped out since late July.
It’s been quite a tough slide to bear for Enbridge shareholders, especially if you added into strength, and while it might feel like a bad time to top up now that shares are one bad day away from entering a bear market, I do think that expectations of higher rates (that could hurt any firm with considerable debt) and the regulatory unknowns are mostly baked in at this point.
That said, the Line 5 drama and leadership transition represent major wild cards that might make it a bit tougher to value the shares now that the premium multiple has (mostly) been eroded.
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The case for Enbridge and its big dividend
Arguably, the midstream energy juggernaut looks to have more to offer than the big banks as the TSX Index starts experiencing pressure to close off what was a fairly robust year. Nothing against the Big Six banks. I still think they’re magnificent long-term investments, even with multiples skewing on the higher side.
For those seeking income, though, their current yields might not be enough to cut it. With Enbridge’s yield hovering close to 6%, it’s very tempting to punch a ticket here, even if it means going against the grain and running the risk of seeing your principal continue to bleed out over the nearer term.
The stock could certainly be cheaper, with the name now trading at 20.5 times forward price-to-earnings (P/E) and, of course, if you’ve watched (or owned) ENB shares in recent years, you’ll also know that a 6% yield isn’t exactly a high watermark for the pipeline juggernaut that’s kept growing its payout, even through rougher patches.
All considered, I don’t consider Enbridge stock to be a sub-par deal this October. The price of admission looks mostly fair, especially when you consider the potential for cash flow growth going into the new year and the expansion opportunities on the horizon. As I noted in a previous piece, we’ll all need to pay close attention to the CEO transition and the fundamental changes they’ll bring.
Uncertainty ahead, but investors are getting paid a lot to keep riding this rollercoaster
There’s uncertainty involved with any top boss transition, but, at the same time, I think there’s really no need to discount the shares over the matter, given that any shifts in the long-term strategy could be beneficial, especially as the firm looks to take things to the next level.
Though it’s too soon to tell if the leadership shuffle represents new risk or a catalyst, I do think there’s plenty of reason to give Enbridge the benefit of the doubt, especially if you’re in the market for a blue chip yielding a safe and growing dividend with a yield close to 6%. As it turns out, there aren’t many 6%-yielders backed by strong fundamentals and a promising growth profile, even with names trading south of the border.
As for the price I’d be willing to pay for Enbridge, I’d say around $63–64 or so, where there’s a nice floor of support. Since we’re pretty close with the name trading at $65 and change, I do view the name as tempting this October, especially if you want to average up your portfolio’s yield.
