Enbridge Inc. (TSX: ENB) stock is down 16% in the last three months. Today, it’s trading below $70 and yielding a very generous 5.7%. Is this downward pressure justified? Is Enbridge stock really so risky that it should be trading at such a high dividend yield?
Well, there are a number of factors driving Enbridge stock’s weakness, including general market weakness and worry. But the bottom line is that Enbridge’s business continues to fire on all cylinders. It is for this reason that I continue to be a buyer of the stock.
Let’s take a look.
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Defensive cash flows
The first thing about Enbridge’s business that I’d point out is the fact that it’s very well-positioned in a defensive business, the energy infrastructure business. This business generates revenue that’s almost completely either regulated and/or under long-term contracts. In turn, this means that the company’s cash flows are highly visible and predictable.
Another selling point is the fact that Enbridge stock is highly diversified, with energy delivery assets across multiple energy markets. In fact, the company is an integral part of the oil, natural gas, renewables and utilities industries, transporting and storing energy for its North American customers.
Today, Enbridge’s gas utility cash flows are a growing part of total cash flows. The move into utilities was an intentional one aimed at further reducing Enbridge’s risk and increasing its stability and predictability.
Industry growth trends accelerating
The North American energy industry is growing. The demand for more power is benefiting utilities, liquefied natural gas (LNG) players, and the renewable energy industry. And it’s coming from increased industrial demand, data centres, and, of course, other countries around the world that want Canadian natural gas (LNG).
At the same time, we are entering a period of very supportive policies around Canadian energy. More specifically, the environment is supportive of growing production and the build-out of the infrastructure needed to support this growing production. Enbridge is extremely well-positioned to meet this infrastructure demand.
Enbridge stock appears undervalued
Despite the fact that the industry is experiencing one of the strongest growth phases in a long time, Enbridge’s stock price reflects a depressed valuation. The positive macro environment is not the only thing that this dividend stock has going for it. The company is diversified, it generates strong cash flows, and it has an exceptional dividend history – 31 consecutive years of dividend increases.
The momentum in cash flows has continued into the latest quarter, with distributable cash flow coming in at $2.9 billion. This was driven by record high utilization and continued strong demand across all of Enbridge’s businesses.
So, let’s get back to Enbridge stock’s valuation. The stock trades at a mere 21 times next year’s expected earnings. This low valuation persists despite the fact that these earnings and cash flow expectations are highly visible and predictable. In my view, these low-risk earnings should translate into a premium valuation for Enbridge’s stock price.
The bottom line
My strategy with Enbridge stock has been to add on weakness. As the company is heading into a strong few years, and the dividend yield exceeds 5.7%, now might be a good time to add.
In any case, Enbridge stock is one dividend stock to keep on one’s radar. In the event of any significant market weakness, I would consider adding, as Enbridge’s business is a defensive and essential one that can be expected to survive and thrive through any weakness.
