Special Free Report From The Motley Fool

Constructing a portfolio is a bit like building a house. At the base of every house is a solid foundation; a portfolio can be constructed in a similar manner. At the core of every portfolio should be a collection of rock solid, proven, long-term moneymakers.

Below, my colleague Jim Gillies gives you the rundown on a Canadian company that exemplifies everything that a core holding should be.

Jim’s write-up has been pulled from our premium report, Top Stocks 2014: The Canadian Investor’s Guide to Outsmarting the Market Today, which features five stocks our analyst team believes will beat the market over the long haul. (The full report is only available to Stock Advisor Canada subscribers — check it out right here.) — Iain Butler

And now, ladies and gentlemen, meet Enbridge (TSX:ENB) (NYSE:ENB) …

Why Buy?

• The tollbooth business model for energy delivery is mostly free of commodity price volatility.
• Solid management is implementing a prudent growth strategy.
• The company pays a reliable, consistent, and rising dividend — and even offers a reinvestment discount.

Energy drives our economies, yet it needs to be in the right form and right place to be useful. Mother Nature rarely plumbs a natural gas well to your hot water heater, and just try pouring crude oil in your gas tank.

Enter Enbridge (TSX:ENB, NYSE:ENB), the owner and operator of a North American energy-delivery network par excellence. Enbridge is a vital link in the infrastructure chain between hydrocarbons in their raw/intermediate forms and the final, usable, products.

As energy demand grows alongside demand for North American energy self-sufficiency, Enbridge sits in an advantageous position to link emerging sources of supply with consumers. Enbridge is dug deep in the Canadian oil sands, the repository of the world’s third-largest oil reserves after Saudi Arabia and Venezuela. Canadians are generally eager to do business with their American cousins, and you likely won’t find a friendlier nation toward America—or investors—within the world’s top 10 oil reserve nations.

Divide the business into two major parts: Energy transportation and energy distribution. For the transportation side, it’s all about pipelines. Enbridge operates North America’s longest crude oil and liquids transportation system. With over 15,000 miles of pipeline in its network, Enbridge delivers 2.2 million barrels of oil equivalents a day. Its system transports nearly two-thirds of western Canada’s crude exports, including 15% of America’s oil imports, making Enbridge, on any given day, America’s top energy contributor (can I get a “Yay, Canada!”?).

Alongside crude and liquids transportation, Enbridge is big into natural gas transportation and transmission. It processes roughly half of current Gulf deepwater gas production and owns a 67% economic interest in Enbridge Income Fund (TSX: ENF), which holds several pipeline assets alongside green power assets that make it the largest solar power generator and second-largest wind power producer in Canada.

For energy distribution, Enbridge owns Canada’s largest natural gas distribution network. If you live in parts of Ontario, Quebec, New Brunswick, Vermont, or New York, it’s a good bet you’re sending cash to Enbridge in your monthly gas bill.

Thesis & Opportunity
Energy transportation is a classic tollbooth business model. You’re undoubtedly aware that oil and gas prices have been volatile in recent years: oil at the high end; natural gas, because of technology innovation and several large discoveries, into the realm of uber-cheap. Yet regardless of commodity price volatility, Enbridge makes its money by the delivery of those commodities. Thus commodity price swings fade toward irrelevance versus a demand equation—where there is demand, crude, liquids, or gas will flow. In short, if America is buying, Canada is selling—and Enbridge is transporting.

And that demand in the Lower 48 offers Enbridge a massive opportunity, in addition to its existing network. Enbridge is currently midway through the largest capital deployment program in the company’s 60-year history, with more than $36 billion of growth capital projects ($29 billion commercially secured) to come online or in service by 2017. To put that into perspective, consider that Enbridge had $42.3 billion of net property, plant, and equipment on its most recent balance sheet.

There are more than 2 million customers in the gas distribution network—it’s a de facto regulated utility monopoly. There aren’t exactly competing sets of gas pipes routed to your door to whom you can switch, so if Enbridge is in your neighborhood, you’re paying it for delivery.

Finally, while handing oil and related liquids can be a dirty business, the socially responsible investor should consider Enbridge’s growing wind, solar, and alternative generation assets, corporate responsibility ethos, and greenhouse gas commitment.

Financials & Valuation
You might not expect an energy company to be a paragon of consistency and reliability, let alone growth. But again, Enbridge is less a textbook energy company subject to the whims of commodity price movements, and more a delivery tollbooth model. Thus, constancy is Enbridge’s stock in trade, and its slate of opportunities allows it to flat-out state that the future is going to look a lot like the past.

Start with the company paying an uninterrupted dividend for more than 60 years. Then realize that it has raised that dividend each of the past 18 years. Witness the power of a consistent and rising dividend on your performance: Over the past decade, Enbridge investors’ annualized return with dividends reinvested is an impressive 16.3%. The dividend yield stands at 2.7%—which might not seem terribly high—but look at the history of dividend increases, and you can see the trajectory.

Dividend growth feeds into my valuation assessment of the company, too. Using a simple dividend growth model, Enbridge today is approximately fairly valued assuming an 8% dividend growth rate. Before you dismiss such future growth as unattainable, realize that the trailing-60-year dividend growth rate is north of 10% and that Enbridge targets a dividend payout of 60% to 70% of earnings. Further, rising earnings will spur additional dividend increases—from the most recent conference call, CEO Al Monaco forecasted annual earnings growth through 2017 of 10% to 12%, “with dividend growth that should follow at least that same trajectory.” At the low end of this expectation, this forecast portends a dividend nudging $1.85 per share in 2017, which would be a 4.2% yield on shares purchased today. As a means of getting the most bang for your reinvested Enbridge buck, consider enrolling in the company’s dividend reinvestment plan—new shares purchased with reinvested dividends even come with a 2% discount!

One potential negative valuation note: Enbridge’s relative multiples are at the higher end of recent history. However, with Enbridge in the midst of an asset buildout, I believe future revenue, earnings, and cash flow will be higher, and that the valuation multiples will overtake today’s price. 

Risks & When to Sell
Growth in recent years has been largely financed through debt and preferred shares—unsurprising in a low-rate environment for a company sporting the consistent cash flow of Enbridge. Expect this leveraging up to continue for its secured projects through 2017. Watch interest coverage ratios (how many times the company earns its required interest payments). If coverage starts falling while dividend increases continue apace, it might be reason to scale back your investment.

The current asset buildout spree may be subject to over-run risk. If so, or if cash flow begins to wane even as the buildout continues, there might be reason to exit.

Finally, political concerns (notably and recently, about the proposed Northern Gateway pipeline) might impact the core business of energy transportation. The scale of Enbridge’s contribution to America’s energy interests should somewhat insulate it, but the risk of government demands usurping corporate interest should be seen as nonzero.

The Foolish Bottom Line
Enbridge is a true buy-and-forget stock that has rewarded investors handsomely. It’s well run, cash-gushing, largely free of severe commodity price volatility, and vital to national interests. Buy, enroll in the dividend reinvestment plan, and tuck the shares away for the next decade or so of steady appreciation.

Top Stocks 2014
Many thanks to Jim for presenting a very compelling long-term opportunity in Enbridge. We hope you’ve enjoyed this special report as much as we enjoyed preparing it for you. It’s been our passion at The Motley Fool to help individual investors build lasting wealth with the very best investments.

To reiterate, this write-up was adapted from our a Stock Advisor Canada premium report, Top Stocks 2014: The Canadian Investor’s Guide to Outsmarting the Market Today; there are four more compelling stock ideas profiled therein! To see the rest of that report, and to claim your membership to Stock Advisor Canada — where we offer up our two favorite North American investments each and every month — read on.

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All figures as of April 2014. 

Jim Gillies prepared this report. Jim is co-advisor of Motley Fool Options and an analyst for Stock Advisor Canada, and at the time of publication, he did not own shares of any companies mentioned. Iain Butler does not own shares of any companies mentioned in this report. The Motley Fool does not own shares of any of the companies mentioned in this report.

This report is: (a) for general information purposes only and not intended as investing advice; and (b) not to be used or construed as an offer to sell, a solicitation of an offer to buy, or an endorsement, recommendation, or sponsorship of any entity or security by The Motley Fool Canada, ULC, its employees and affiliates (collectively, “TMF”). This report represents the opinion of the individual author and does not attempt to give you professional financial advice or advice that relates to your personal circumstances.

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