Enbridge: Proven Business Model, Growing 7.1% Dividend Yield, Industry-Beating Returns

Jul. 24, 2021 5:57 AM ETEnbridge Inc. (ENB), ENB:CA65 Comments

Summary

  • Enbridge is the largest midstream energy corporation in the world.
  • Enbridge also offers investors a strong, safe, growing 7.1% dividend yield, and industry-beating returns.
  • An overview of the company follows.
  • This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »
Oil Or Gas Transportation With Blue Gas Or Pipe Line Valves On Soil And Sunrise Background
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Enbridge (NYSE:ENB) focuses on high-quality low-risk midstream assets.

These assets have reliable revenues and cash-flows, allowing Enbridge to deliver strong, consistent dividends to shareholders.

These dividends allow Enbridge to outperform its riskier peers, and the energy industry as a whole.

Enbridge's proven business model, strong, safe, growing 7.1% dividend yield, and industry-beating returns make the company a strong buy. Enbridge's strong yield make the company a particularly appropriate choice for income investors and retirees looking for safe, reliable dividends in the energy space.

Enbridge - Business Overview

Enbridge is a midstream energy corporation focusing on the transportation, distribution, transmission, and storage of crude oil, natural gas, and other petrochemical products. Enbridge also has some smaller, rapidly growing, renewable energy assets. These assets serve to diversify the company's revenue streams, and position the company for the coming renewables boom.

(Source: Enbridge Investor Presentation)

Enbridge is the largest midstream energy corporation in the world. It is also one of the largest energy corporations too, but quite a bit smaller than the giants Exxon (XOM) and Chevron (CVX).

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Data by YCharts

Enbridge, as all blue-chip midstream energy companies, focuses on the transportation and distribution of petrochemical products. Basically oil pipelines.

Specifically, Enbridge focuses on transportation crude oil from the oil-rich western province of Alberta, Canada, to transportation hubs and refineries in the Eastern United States. From there, (refined) products are shipped to population centers across North America, or to export facilities in the U.S. Gulf Coast.

The transportation of crude oil from the (comparatively) remote province of Alberta to more centrally located, economically important centers in North America is one of the largest, most lucrative midstream opportunities there is. Enbridge is right in the middle of it, and it doesn't have (too much) competition.

(Source: Enbridge Investor Presentation)

Importantly, these activities have stable, recurring revenues. in which Enbridge receives flat fees in exchange for space / utilization of their facilities. In simple terms, Enbridge sells space on its pipelines to oil producers. Revenues are rarely (wholly) dependent on actual utilization rates: Enbridge receives (some) fees even if the oil producer doesn't utilize the pipeline.

Enbridge also generates a portion of its revenues from the generation and distribution of renewable energy. These activities are generally regulated by the government, with clearly defined prices, profits, and returns. Revenue risk and volatility are both extremely low.

Enbridge generates over 98% of its cash-flows from the two stable, recurring activities mentioned above. This is a significant benefit for the company and its shareholders, as it somewhat insulates the company from broader economic and industry conditions. Expect (mostly) stable revenues during downturns and recessions.

(Source: Enbridge Investor Presentation)

Importantly, neither of these activities have direct energy exposure either. Enbridge receives the same fees regardless of energy prices. Remember, Enbridge is mostly selling / contracting out space / utilization of their transportation, distribution, and storage facilities, not selling energy products per se. As such, it makes sense for the company to have little direct energy exposure, it (mostly) isn't selling energy products to being with.

There is indirect energy price exposure though, through credit risk. In simple terms, if energy prices decrease, some of Enbridge's customers will go bankrupt, and a bankrupt costumer pays no fees. Enbridge focuses on investment grade clients, with these accounting for 95% of the company's cash-flows, so credit risk is quite low regardless.

Let's summarize.

Enbridge focuses on the transportation and distribution of energy products, activities which have stable, recurring revenues and cash-flows.

This has important implications for the company and its shareholders.

Let's have a look.

Enbridge - Financial Track Record

Enbridge generally sees strong financial results, with solid, albeit more moderate, long-term growth. The upwards trend is undeniable:

(Source: Enbridge Investor Presentation)

As can be seen above, Enbridge has seen consistent, strong earnings and distributable cash-flow per share growth for the past fifteen years, and counting. Double-digit CAGR is the norm, but growth has slowed down in the past few years.

Importantly, Enbridge sees strong financial results regardless of economic conditions or energy prices. Recessions and commodity price slumps have little effect on the company's performance, although do bear in mind that little doesn't mean zero.

The coronavirus pandemic year is the clearest example of this. In 2020, when the pandemic started, oil prices collapsed by more than 50% in a matter of months. This was due to bearish market sentiment, weakening economic conditions, and cratering demand, all because of the pandemic. There were geopolitical concerns too, with Saudi Arabia and Russia both massively increasing production, even as prices cratered. Oil prices briefly turned negative. Conditions and prices markedly improved later in the year, but oil still ended the year down double-digits.

Chart
Data by YCharts

Enbridge, however, focuses on activities with stable, recurring revenues and cash-flows. These activities have little exposure to economic conditions and energy prices, and so should have seen little impact from the coronavirus pandemic, or from cratering energy prices.

That was indeed the case.

Enbridge weathered the coronavirus pandemic reasonably well. EBITDA was flat for 2020, earnings were moderately up, while distributable cash-flow was slightly down. These are not fantastic results, at not least in the grand scheme of things, but are quite strong considering the circumstances. Stability in the face of Armageddon is quite good.

(Source: Enbridge Investor Presentation)

As the above are all adjusted non-GAAP management figures, I thought to have a look at more standard, more reliable GAAP figures. Adjusted figures tend to better reflect the underlying, actual financial results of a company, but sometimes the adjustments obscure more than they reveal. Plus, better to have a look at the data yourself, not just at what management wants you to look at.

Enbridge actually posted some solid GAAP operating cash-flow growth in 2020, stronger results than those presented by management, or adjusted figures. From what I've seen, the discrepancy was due to changes in operating assets and liabilities, which are included in GAAP figures, but not in adjusted figures. These adjustments makes sense. Lower operating cash needs are not commensurate with higher cash-flows, regardless of what the accountants say.

(Source: Enbridge Annual Report)

Enbridge's GAAP earnings, on the other hand, were down by much more than its adjusted figures.

The discrepancy was due to asset impairments.

In simple terms, the company had many assets, pipelines and the like, which simply weren't profitable during the pandemic, and had little probability of profitability moving forward. Enbridge wrote off these assets, and told investors that whatever money was invested in these was (mostly) lost.

It does make sense to remove these figures from the company's earnings, impaired assets are not losses or costs per se, but investors do need to be aware of these. Impaired assets are a sign of lower growth opportunities moving forward, and a significant negative for the company and its shareholders.

(Source: Enbridge Annual Report)

In any case, seems quite clear that Enbridge weathered the coronavirus pandemic relatively well. Losses were somewhere between low and non-existent, across al relevant financial measures.

Let's summarize.

Enbridge generally sees strong, consistent financial results, with solid long-term growth, and extremely low losses during downturns.

Enbridge - Dividend Track Record

Enbridge's strong, consistent financial results directly lead to even stronger, growing dividends for the company and its shareholders.

Enbridge currently yields 7.1%. This is a very strong yield, and much higher than that of the broader equity market or the energy industry. Few other companies offer yields as high as Enbridge.

Chart
Data by YCharts

Enbridge's dividend is also incredibly stable and consistent, with over 26 years of uninterrupted dividend payments and dividend growth.

(Source: Enbridge Investor Presentation)

Enbridge's dividend has weathered several recessions and commodity price slumps without significant issues. This is a direct result of the company's proven business model and consistent, reliable revenues and cash-flows. As such, I'm confident that the company's dividend is safe, and that dividend cuts are unlikely.

Enbridge targets a 60-70% dividend cash-flow payout, so the company does generate more than sufficient cash-flows to fund its dividends without issues.

(Source: Enbridge Investor Presentation)

Dividend growth has been quite strong too, with Enbridge's dividend growing at a double-digit CAGR since inception, and for most relevant time periods.

(Source: SeekingAlpha)

Enbridge's growth has moderated these past few years, with management guidance for 5-7% annual growth moving forward. Although the lower growth is a negative, it was also unavoidable. The largest midstream energy corporation can't simply grow at double-digit rates forever, the market just isn't there for this.

(Source: Enbridge Investor Presentation)

Enbridge offers investors a strong, safe, and growing 7.1% dividend yield, a solid combination.

Enbridge - Performance Track Record

Enbridge's strong dividend yield and outperformance during downturns and recessions has led to even stronger, industry-beating returns. Enbridge's performance is as follows.

(Source: SeekingAlpha - Chart by Author)

Several things stand out about Enbridge's performance.

Enbridge generally outperforms relative to its industry, due to the company's proven business model, strong financial track record, and high dividend yield. This has been the case since inception, and for the past ten years or so. Strong returns are a significant benefit for the company and its shareholders.

Enbridge also performs particularly well during downturns and recessions, due to the company's stable, recurring revenues. That was the case during 1Q2020, the onset of the coronavirus pandemic. Outperformance during downturns is also a significant benefit for the company and its shareholders, and of particular importance for more risk-averse investors and retirees. Capital preservation is paramount, and Enbridge is better than its peers in this regard.

Enbridge somewhat underperforms during the most bullish of bull markets, and when commodity prices and energy industry valuations skyrocket. That has been the case for the past year or so. This is the flipside of the company's recurring revenues: stability means both lower losses and gains. Although the net effect is positive, Enbridge has outperformed since inception, there are drawbacks too.

As a final, more negative, point, Enbridge has underperformed the S&P 500 for the past ten years or so. Underperformance has been due to bearish industry sentiment, rising equity market valuations for most industries except energy, and lackluster commodity price / energy industry growth. Enbridge's underlying financial and dividend growth has been quite strong, but the market doesn't see it that way.

Enbridge's lackluster results vis a vis the broader equity markets has many important implications, but I think the most important one is a reminder of the virtues of diversification.

If you had massively overweighted Enbridge in your portfolio you would have underperformed.

If you had invested in a small number of core high-quality midstream energy corporations, but kept the overall energy exposure close to that of the market, you would have outperformed.

Diversification is key, and a diversified portfolio of best-performing industry securities like Enbridge would have delivered outstanding results in the past. A concentrated energy portfolio, on the other hand, would have significantly underperformed. Although making industry calls is not per se bad, diversification is key.

Enbridge - Synthesis

Enbridge's overall investment thesis and benefits are all related, and stem from the company's business model.

Enbridge focuses on high-quality low-risk midstream assets.

These assets have reliable revenues and cash-flows, allowing Enbridge to deliver strong, consistent dividends to shareholders.

These strong, consistent dividends allow Enbridge to outperform its riskier, less reliable counterparties, and the energy industry as a whole.

Enbridge's dividends and returns are the result of a strong, proven business model. As long as the business model remains the same, expect the same strong results.

Enbridge - Looking Back

Long-time readers probably know that I used to write more extensively about Canadian equities and midstream energy corporations. I've since switched to mostly writing about more diversified equity and bond funds, as I've found it easier to construct diversified portfolios with these.

Still, I've been meaning to revisit some of these older articles and investment call, to see how I did. In the past, I've been bullish about some of the larger midstream energy companies. These include Enbridge, previously covered here, Enterprise Product Partners (EPD), here, TC Energy Corporation (TRP) , and Pembina Pipeline (PBA).

The investment thesis for these companies was basically the same. All securities:

  • focused on the transportation and distribution of energy products, and so had stable, recurring revenues
  • offered investors strong, safe, yields
  • outperformed during downturns, and long-term

Since then, all securities have significantly outperformed relative to the energy industry, generally by double-digits per year, and grown their distributions too.

Chart
Data by YCharts

I was also very bullish about the Global X MLP & Energy Infrastructure ETF (MLPX), as this fund focuses on high-quality midstream energy corporations, basically the same companies as above. MLPX also outperformed relative to the energy industry since:

Chart
Data by YCharts

and has also seen strong dividend growth in the past few years:

(Source: SeekingAlpha)

Point being, looking back at my previous investment calls, all companies / funds I identified as high-quality midstream energy corporations with stable revenues and safe dividends performed exactly as expected, with no surprises. I made right, appropriate calls then, and I do believe that I'm making right, appropriate calls today.

Not all the investment calls were successful, however. I also wrote about NGL Energy Partners LP (NGL), with a bullish, but nuanced, perspective.

NGL was a very risky, fragile company, but one with a clear long-term strategic vision, which should have led to strong market-beating returns. NGL managed to execute on it long-term strategy reasonably well, leading to strong, market-beating returns for a year or two. Then the coronavirus pandemic hit, and the company imploded.

Chart
Data by YCharts

Although NGL did perform worse than expected, I wasn't expecting the pandemic three years ago, results were broadly consistent with my analysis. I did tell investors that NGL had excessive commodity price exposure and a very weak balance sheet, and that these two factors significantly increased risk. NGL's implosion during the pandemic was understandable, and I do think that my previous coverage would have been useful in understanding what happened.

Point being, I think if you look at my previous midstream energy industry coverage, you'll find I always gave investors an accurate, informative, unbiased analysis. I've had wrong, unsuccessful calls, but fewer cases of misidentifying risky companies and dividends. The analysis was accurate, and valuable too, with most of my picks outperforming. I'm confident that the present analysis is valuable too, and that Enbridge will continue to outperform relative to its industry, as has been the case since I first covered the company.

Conclusion - Strong Buy

Enbridge's proven business model, strong, safe 7.1% dividend yield, and industry-beating returns make the company a strong buy.

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This article was written by

Juan de la Hoz profile picture
7.33K Followers
CEF/ETF income and arbitrage strategies, 8%+ portfolio yields

Juan has previously worked as a fixed income trader, financial analyst, operations analyst, and economics professor in Canada and Colombia. He has hands-on experience analyzing, trading, and negotiating fixed-income securities, including bonds, money markets, and interbank trade financing, across markets and currencies. He focuses on dividend, bond, and income funds, with a strong focus on ETFs, and enjoys researching strategies for income investors to increase their returns while lowering risk.

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I provide my work regularly to CEF/ETF Income Laboratory with articles that have an exclusivity period, this is noted in such articles. CEF/ETF Income Laboratory is a Marketplace Service provided by Stanford Chemist, right here on Seeking Alpha.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

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