Enbridge: 7.20% Yield? Yes Please

Summary

• Enbridge is currently yielding 7.20% and paying out on a quarterly basis.
• The dividend is safe thanks to continually growing DCF.
• Enbridge continues to invest in themselves and expand their networks which helps grow cash flow.

Photo by JHVEPhoto/iStock Editorial via Getty Images

The hunt for solid dividend stocks never ends, but it does get a lot easier after you add a stock like Enbridge (NYSE:ENB) to your portfolio. 7.20% yield with the potential for solid capital gains does not present itself every day, yet here we are. Enbridge is a world-class Canadian company that has gone global with some renewables projects in Europe. The company has about $16 billion in capital spending happening over the next 3 years as of today and I fully expect that to continue to increase. That investment will yield fruit and DCF will continue to grow which in turn allows the dividend to continue to increase. I am bullish on Enbridge long term.

How About That Yield Though?

Let's get to the reason most of you are here. 7.20% is a massive number in the dividend game, especially on the US side of things. I mean, to crack into the top 25% of the US market, you have to be at 3.5%. Enbridge is currently yielding more than double that. Enbridge has a very strong history of dividend increases and even COVID couldn't kill that. It is very impressive that companies that track resource industries like Enbridge can manage to pay these kinds of dividends. Anyone who knows anything about the pipeline business knows they are all well known for their high dividends. I would hope everyone has pipeline representation in their portfolio one way or another on that alone.

One of the big concerns from those who don't hold pipeline stocks is always the safety of the dividend. In my experience, one of the best ways to determine the safety of a dividend is to take a look at the quarterly reports and scroll down to the Q&A section. If there is a general analyst concern, they will ask about it, often more than once. Well, in the most recent Q4 conference call, it was not mentioned in the Q&A once.

Looking at general payout ratio metrics will show that Enbridge is deep in the hole and due for a cut. But that's not how Enbridge bases its dividend decisions. They look towards distributable cash flow (DCF). The good news is that DCF is strong and continues to grow, which means that the dividend can grow as well. For reference, DCF for 2020 came in at $9.44 billion and paid out $6.56 billion in common dividends. This works out to about a 70% payout ratio which is high, but affordable given the cash flow that Enbridge is pumping out. What this shows is that there is nothing to worry about at all when it comes to the dividend. Let it sit in your account and continue to pay you every quarter. You won't regret it.

What Is Going To Keep Growing Cash Flows?

Above I mentioned DCF and mentioned that we should be looking at that when it comes to dividend safety. Which begs the statement: "Well if my dividend is dependant on DCF, that better be increasing every year if my dividend is going to continue to increase!" And it's a fair one at that! So how about 2020, where we saw one of the worst economic and energy downturn in decades? Well, the company actually grew DCF year over year.

(Source: Company Presentation)

Looking above, we can see all of the factors that attributed to this. We can see that EBITDA didn't really move all that much. But Enbridge saw improvements in some key areas. New assets like Hohe See and Gray oak helped drive Cash distributions. Efficiencies in the process helped cut maintenance capital by $168 million. One of the big proponents came from cash that was collected from shippers with make-up rights that came mostly from Q2/Q3.

Where is all this future growth going to come from? Well, their world-class asset mix makes it pretty easy. The company is home to a few major business segments. The largest of which is their gas transmission segment. They serve over 170 million people and help over 14 million people get the gas they demand in its Canadian utility franchise.

(Source: Company Presentation)

What you will see on the news is the liquid pipeline segment. This runs both in the US and Canada and helps move over 12 million barrels per day. Their unmatched infrastructure helps move Canadian heavy crude to the US Gulf Coast from multiple supply points. The beautiful thing about liquid pipelines is they are getting really hard to duplicate with increased regulations and the green energy take over. As Demand for the heavy Canadian crude continues to increase, Enbridge is in a position to continue to leverage its infrastructure to help feed the wonderful dividend that we all enjoy.

Typically to grow, you need to invest. This is exactly what Enbridge is doing as you can see below. As of now the capital program for 2021-2023 is sitting at $16 billion. $10 billion of which will be spent this calendar year. I imagine this will grow as time goes on.

(Source: Company Presentation)

One of the big concerns around pipeline companies is their longevity when it comes to green energy. Well, as you can see above there is about $2 billion being spent on renewables projects most of which are being built in Europe. I am curious to see what this grows too over the next few years. Most of these projects are expected to be completed in 2022 and 2023 and I fully believe this is a segment that Enbridge will continue to grow as the years go by.

So where does this all take us? Well, it means growth which is good news for your dividend. Looking below we can see that both EBITDA and DCF are expected to grow. There is a lock of about $200 million of EBITDA contribution in Q4 of this year thanks to the completion of Line 3 in the US.

(Source: Company Presentation)

The Canadian Dollar is expected to recover over the course of this year and get closer to the US dollar which Enbridge does have hedges for, but it means that the US dollar debt translation looks quite a bit nicer at the end of the day. Enbridge has priced in some inflation as it is expected we also see some of that to some extent this year. How much is yet to be seen. 60%+ of revenues have embedded escalators. Lastly, it is fully expected that we see higher corporate taxes which will affect the bottom line to some extent. All of this considered, growth is still forecasted and growth is good when it comes to funding that annual dividend increase.

What Are The Risks?

The big risk I see here for Enbridge is the green movement in both the US and Canada. If line 3, which faces daily protests almost daily cannot get finished, the company could face losses of billions of dollars. The good news is that the Canadian side is all completed. It is just the US now that is left. It is expected that the US side is finished by the end of this year. But that could change with government regulations. However, I do remain optimistic as a whole on this project considering how much of it is already completed and it would be silly to waste that effort at this point. But I have been wrong before.

Beyond that, any further pipeline projects are always risky bets in the current political environment and that is something that cannot be forgotten when investing in a company such as Enbridge.

What Does The Price Say?

Besides the wonderful dividend, there is actual capital gains potential here as well. Which is important in the long run. Looking below we can see that based on 10-year forward cash flows, otherwise known as fair value, the company is undervalued by about 14%. I think $43 is a very fair target. This takes us back to where we were pre COVID which I'm sure many would welcome. After reaching a high of over $57 in 2014, 2016 brought the "generational buying opportunity" and COVID brought on another. I imagine most of you reading this have been holding for quite some time and are happy to continue to do so.

(Source: Simplywall.st)

So what does that road back to $43 look like? Technically speaking, A slow and bumpy one I think. I'm going to start with the famous 200-day moving average. The funny thing about it is the stock always comes back to it eventually. Looking below we can see that for the most part, the moving average has been a source of support and resistance, which is good. I want to draw your attention to the circled part of the chart. This is where we really fell off a cliff. and it just so happens we juggled around the 200-day before limiting down. Coincidence? I think not.

(Source: TC2000.com)

The bad news here is that we are due for a touch. Now we could see another run as we saw in late 2019, but the farther we get away from that moving average, the bigger the drop will be. We are only about 10% away from it as we stand right now which is about the same as the first drop to the moving average in early 2020. Obviously, as we move higher, so will the moving average, which takes us to physical support lines.

The first one is approaching quickly. That is ~37.81. Looking below we can see why that is. This was a crucial support line through 2019, and once again lines up with that juggling of the price before we limited down in the COVID crash in 2020. The stock has slowly ground its way back to this point. Will we breakthrough on the first shot? I'm not so sure.

(Source: TC2000.com)

So if we bounce off this, where could we settle? Well, $34 has been a magnet for years. Below is a time frame going back to 2018 and there have been more than 12 times the stock has reacted off this level one way or another. This trend dates back to 2011 when the stock fought against this level before blasting to the $50 range. If the stock broke this level again, I would look to sell. I do not think that will happen in the short term though.

(Source: TC2000.com)

I hope it's easy for us to all see the target on this chart. It's that green peak in early 2020. Getting back to pre-COVID levels will happen at some point. That I have no doubt about. This stock will continue to perform long term. So, why not get paid to wait? That's where that beautiful dividend comes into play. Enbridge is here to stay.

Wrap-Up

As you can see, there is a lot to like about what Enbridge has to offer. There is no question that pipelines are here to stay for the foreseeable future. We will rely on the infrastructure in place and Enbridge has plenty of that. Throw on a dividend that is currently yielding 7.20% and that is hard to beat. The future is bright for Enbridge and I fully anticipate that they will continue to adapt to the times and will always be a world leader when it comes to energy. I am long Enbridge and happy to collect my dividend. Stay safe out there!

Analyst’s Disclosure: I am/we are long ENB. 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.

Comments

[jara-mill]

Just trimmed some STOR to add to ENB. Great yield!

[Dale Roberts]

I know eh? Most are missing this, TC Energy too. Even if you just play it for the next year or two. The energy demand will get a nice spike. The cash and dividends will flow.

I'm in for the long haul.

Dale

[Rinascimento]

I just bought an ENB full position a few weeks ago by missing the x-dividend date at about $34.xx; thank you for article

[bearcub1936]

Good Article
Am Bookmarking
Thank You

[The_truth_unc0vered]

Long ENB, built my position when the yield was between 9.5 & 9.8% and now do the drippy-thing. Great stock, although it is met with lots of hostility in the western world

[Baldy2000]

@The_truth_unc0vered Yep, Indians in MN beating their drums again.

[Sunshine123]

Very good analysis of ENB.

[Dabub]

I seem to find myself on the bullish side of things today. Love ENB and think it is one of my two most undervalued holdings at the moment. I'm looking at the target share price around a 4-5% yield given its strong management, outstanding financial outlook guidance (15 years in a row of hitting the mark), and utility-like revenue and earnings profile and dividend CAGR. At 5% it'd be around $52/share, at 4%, it would be $66/share. The FUD around MI and US government activity is holding it back but comparing it to a utility like "coal ash in the rivers" DUK that pays 4%, ENB is the runaway choice.

[User 51751095]

Good analysis so course I agree. This is a solid choice like EPD.

ON the risk there is Biden. Who just flawlessly shut down the construction of the critical XL pipeline. Which was irrational hostility to hydrocarbon energy and nothing to do with lowering emissions.

The risk to the existing pipeline is the continuation of the Obama routines. Nonsense methane pipe regulations when there has been a dramatic reduction in emission despite a near doubling in natural gas production. Along with the insane idea of forcing hydrogen into the natural gas supply.

But the above is handled with portfolio diversification. Good solid yield in this market.

[SomeGuy14]

@Mad Who

I think the market vastly undervalued the BENEFIT shutting down Keystone XL was to ENB. It was huge. That alone was likely worth a $5 bump in share price.

Then we've got the Biden infrastructure plan. Well hold up, you say, they aren't spending that on pipelines.

No, sir. Thank God for ENB. They're spending it on asphalt ... requiring heavy Canadian oil. Oil that needs to be moved by ENB pipeline to where it can be blended and used.

So far, Biden has been VERY good for ENB. The market will figure that out eventually.

[User 51751095]

@SomeGuy14 Well your claims are startling and puzzling.

6% of the deceptive 'infrastructure bill' is real structure. So where on earth this asphalt stuff popped into your head is mysterious.

The hoped-for or rather imaginary incremental barrels of Canadian crudes for heavier product cracking will have to be trained. Which means more emissions and economic dead weight.

The difference between investment, consumption, and just plain waste that keeps giving like economic dead weight?

We can discuss this if you wish. But it should be simple to understand infrastructure investment has an economic multiplier due to increased economic efficiency. Like XL clearly does.

As for market valuation. There is a good probability it will go higher. Trump warp speed vaccinations will have our economy open very soon. Along with natural herd immunity in big states like Florida, Texas and Tennessee... So in general I would expect a burst of consumer spending on services, travel and experience. (We never stopped buying the communists crap)

But given the sustained economic scaring and destruction in draconian anti-science states like California and New York? These large states may have sustained damage to small businesses. It is small business that generates jobs.

Plus it is now very clear that progressive lockdowns in states Michigan has made the situation worse. No build in natural herd immunity so scary spikes in infections today. Without a gradual opening like Texas, Florida, and Tennesse. Hopeful it spikes and settles. But there is a possibility the big blue states are offline for many more months. (They require much higher vaccination rates to make up for probable lack of herd immunity)

So yes, I expect we will soon have eye-popping earnings reports. The market will not look so expensive. High but reasonable. But we have inflation already boiling in food and energy.

www.statista.com/...

Unlike the dreary eight-year utter failure of Obama, companies are passing that PPI inflation on to consumers. The Fed can only manipulate long interest rates if the economy is very weak. If deflation rather than inflation is the primary concern. Almost impossible to inflict for eight years but Obama did.

If the PPI shows a three-month increasing trend reaching 6%? While companies have the pricing power to pass it on?

Should our 30-year treasury bond be far below 3%? What happens to market valuation if interest rates double from here?

I am not sure where the settlement point is. Once the sugar rush is over. But it is very unlikely to be a happy place. Especially if a large investment killing increase is made to corporate marginal interest rates.

Progressives and fools always rush in. As Wall Street infects them with Juan Williams zombieism.

Stalled employment and inflation is a very real probability. Housing, energy and food inflation kills our hard-working Americans. Full employment and gains in real living standards drove consumption in the outstanding Trump years.

What happens if we reverse this? What happens if interest rates spike.....

I would think much better about all this if someone in addition to me was climbing the healthy wall of worry. Rather than charging forth like Wall Streets Juan Williams zombie herds.

[Long Time Running]

@Mad Who , you better pay your dues to Mara Lago...they have n automatic deduction plan for you.

[Griffin100]

@Graham Grieder Was "The funny thing about it is the stock always comes back to it [the 200-day ma]" a joke? Of course it does, it's an average. And as for "it just so happens we juggled around the 200-day before limiting down.", well there are other points on the chart where the price moved around close to the 200-day ma, then ignored it completely.

[Graham Grieder]

@Griffin100 It's a joke, but you'd be surprised how many people think stocks or indexes for that matter will never touch their moving averages again.... Im not sure which points you are looking at as from what I can see there has been significant action at it every time one way or another.

You don't have to agree or like technical analysis, I know it's not for everyone. Buy and hold if you so wish.

[smurf]

Reasons not to buy ENB:

1. Canadian company...USA investors have minor hassle of recovering Canadian w/h (unless held in an IRA).
2. Fossil fuel...out of favor in both countries.
3. Pipeline company...always being sued or denied access by somebody.
4. Pipeline company
5. Pipeline company
6. Pipeline company

[pktasap]

@smurf nothing wrong with energy companies or pipelines. Take a look at EPD. No taxes until you sell or your capital account goes below zero. There are also Preferreds, some paying more and in US dollars

[sandrineblack1]

@smurf The "minor hassle" is merely a few clicks in common income tax software in order to claim a foreign tax credit on Form 1040.

You get all of your money back.

[translate]

@sandrineblack1
recovering ~90% of the held tax with some carryover is not uncommon. depending on circumstances, you could recover all the carryover in some year.
and if using intuit, it does seem they have rectified many form 1116 errors in the past, but review is needed especially at the state level.
much simpler than a k-1 for sure.

[motto5448]

Gotto love the guy who says the stock has gone nowwhere in two years who cares collect the 14.5% divy

[Old Professor]

"Enbridge continues to invest in [itself] and expand [its] networks[,] which helps grow cash flow."

[ribana75]

7.6%? Yeah in candadian dollar. 😆🤣😂😹

[SomeGuy14]

@ribana75

Umm....

Should I tell him or someone else?

The percent paid is the same regardless of currency being used...

[jimb9282]

@SomeGuy14 Shh, it’s supposed to be a secret...

[ActivBoisson]

Always like to see people speak up and remove all doubt.

[G. Blair Bauer]

Stock has gone nowhere in 2 years and they just lost American pipelines. PASS.

[Dabub]

@G. Blair Bauer So you love BP and RDS, hate ENB and XOM. We're polar opposites.

[elliot_mllr]

Mr. Grieder:
If the company does hedge Canadian vs US dollars, why doesn't it pay dividends to US shareholders in US dollars?
Elliot Miller

[Graham Grieder]

@elliot_mllr Becasue they balance in Canadian. This is why they have the hedge for the American income as they draw revenue from the US. This is true of all Canadian dividend payers.

[pktasap]

Two missing items in this article. First what is the yield in US dollars? Second there is an automatic 15% tax deduction, which if the proper paperwork isn’t filed, could be more

[LAFolk]

@pktasap Withholding only occurs if the stock is held in a non-tax-deferred account. Long on Enbridge.

[nothing_lasts]

@pktasap no taxes in 401k account:
www.enbridge.com/...

[bo0bo0]

@pktasap

"First what is the yield in US dollars?"

The dividend is paid in Canadian dollars. The value of that changes daily as the exchange rate for the US dollar and Canadian dollar changes.

[marissamae]

Curious. Why do you say Writing my level 1 CFA? When I passed level 1 I said, "I took the level 1 exam". Is this the difference in culture? I am an American and you seem to be from the British common wealth. By the way sorry for your loss with Prince Phillips passing.

[Graham Grieder]

@marissamae When you are registered to take the exam that is what you have to put it down as, as per the CFA institute. Just following the rules haha.

[jara-mill]

@marissamae - That's definitely a culture difference in the wording. I know lots of people from India use that word "writing" instead "taking" an exam/test.

P.S. - Small allocation position in ENB