The Best Time To Buy Enbridge In 10 Years

| About: Enbridge Inc. (ENB)
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Enbridge tops my list of dependable dividend growers, but this blue-chip stock has never been cheap.

Low oil prices have triggered a mass exodus out of energy stocks, include high-quality, blue-chip names.

The sell-off has created a once-in-a-decade opportunity to scoop up Enbridge shares on the cheap.

Enbridge Inc. (NYSE:ENB) tops my list of dependable dividend growers, but investors have always priced shares a little too richly for my blood. That is until Mr. Market threw his latest fire sale.

The company owns thousands of miles of pipelines across the continent, including a number of utilities, terminals, and processing facilities. Investors prize these assets for their steady cash flows and large barriers to entry. And thanks to the surge in U.S. energy production, pipeline owners have made money hand over fist.

Yet, despite this generally favorable backdrop, Enbridge faces several challenges. For one, building new pipelines has become a political hot potato, jeopardizing the company's expansion plans. More recently, low oil prices threaten to end America's oil boom, which will eventually crimp profits.

The one-two blow has triggered a mass exodus out of the oil patch. For income investors, though, the sell-off may have created a rare opportunity to scoop up Enbridge shares on the cheap. To be sure, let's take a deeper dive into this dividend.

The Dividend - Is It Safe?

First, we want to check the company's capacity to pay dividends at the current rate.

Do earnings cover the distribution? Does the company have a track record of paying out dividends through thick and thin? For those of us who rely on distributions to pay the bills, we can't afford to watch our stream of income suddenly dry up.

Although you have no sureties when it comes to investing, Enbridge's distribution looks rock-solid. The company has paid out a dividend to shareholders for 68 consecutive years. Though booms, busts, and crises, investors have always counted on their Enbridge dividend checks arriving in the mail.

That tradition will likely continue. The company derives most of its income from fee-based businesses that don't depend on near-term commodity prices. Furthermore, management only pays out half of adjusted cash flow from operations, providing plenty of wiggle room if business turns south.

The Dividend - Will it Grow?

Enbridge's 4.5% yield looks great, but it's not enough itself to provide an adequate return. For that, we need to see if the company can increase that payout over the next few years.

Last year, Enbridge shored up its growth profile with the acquisition of Spectra Energy. The deal diversified the company's operations toward natural gas, giving it a foothold in the fast-growing Marcellus shale formation. As such, investors enjoyed a 15% dividend hike immediately following the purchase.

Shareholders can expect more of the same going forward. Management has targeted a long-term dividend growth rate of 10-12% annually, driven by new pipelines and more cost-cutting initiatives. I also see the potential for executives to increase the target payout ratio above the current 50-60% range.

The Dividend - What's the Return?

With investors treating energy stocks like lepers, we've seen even high-quality names like Enbridge get marked down.

Today, shares trade near a 52-week low and at some of the lowest multiples on many metrics in over a decade. I'm impressed, though, by the company's mid-single digit yield and low-teens dividend growth rate. That puts our long-term return from dividends alone somewhere around 15% annually, representing one of the best values around.

Of course, Enbridge is hardly a sure thing. Like I mentioned, growing political opposition to pipelines could make it tougher to build new routes. Lower oil prices will eventually force energy companies to dial back production upstream, which could crimp Enbridge's growth numbers.

That said, we have a lot of room for error here. Even if we've overestimated Enbridge's growth potential here by double, you still earn a satisfactory high-single digit return. And given management's history of under-promising and overdelivering, I'm not too worried about that outcome.

Bottom line

Some investors want to throw in the towel on Enbridge. And if you like flipping stocks for quick profits, I'd have to agree. But for dividend growth investors thinking beyond the next quarter, this might be the best buying opportunity Mr. Market has handed us in the last ten years.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.