Enbridge: Rich 7% Yield, Bridge The Income Gap To Retirement
- Enbridge has a bit of everything, from fossil fuels to renewables, and comes with a combination of high yield and growth.
- It pays a well-covered dividend and has plenty of post-dividend capital to invest in strategic projects.
- I highlight what makes Enbridge a solid Buy at the moment for potentially strong returns.
Nobody said investing was easy, and in fact, it’s not even a subject that’s taught in schools. Most experienced investors, today, are therefore self-taught through both personal experience and learning from the habits of investment legends, like Warren Buffett, Benjamin Graham, and Joel Greenblatt.
There are some that rightfully throw their hands in the air, and choose to go with an index fund, where they can feel “safe” with a highly diversified basket of stocks. However, the paltry 1.3% yield given by the S&P 500 (SPY) simply isn’t going to cut it for most income-oriented investors.
Plus, I personally find indexes to be boring, and there are companies in an index in which I’m simply not interested in buying into. This brings me to the following name, which has a diversified business in its own right, while providing meaningful income and growth at the same time. I highlight what makes it a solid Buy at the moment, so let’s get started.
Bridge To The Future
Enbridge (NYSE:ENB) remains one of my favorite names in the energy space, given its moat-worthy presence as a leading North American energy company (based in Canada). It has a bit of everything for everyone, as it transports 25% of crude oil used in North America and 20% of natural gas consumed in the U.S.
In addition, Enbridge operates a gas distribution network serving 3.8 million retail customers in Ontario and Quebec, and is the only energy midstream company to make a meaningful foray into renewable energy, generating 1.8 MW of renewable power in North America and Europe. As seen below, ENB has 10-15 solar projects in the near term, which could generate around half-billion worth of opportunity through 2023.
(Source: Investor Presentation)
Enbridge is seeing a meaningful bounce in its business as the economy has come back, with gas and liquids transmission improving by 5% and 2% during the second quarter. ENB is also positioning itself for increased demand, as management expects to place $10 billion worth of capital project into service this year.
ENB has a well-balanced $17B capital spend program across liquids, gas transmission & distribution, and power, with the expectation of growing DCF (distributable cash flow) at a 5-7% annual CAGR through 2023. This provides support to the already well-covered and strong 6.6% dividend yield. Based on management’s guidance for $4.85 DCF/share this year, the dividend is protected by a robust distribution coverage ratio of 1.82x.
(Source: Investor Presentation)
The strong coverage ratio leaves plenty of self-funding capacity, with a total of $5-6 billion in annual investment capacity after dividends. Management expects to use $3-4 billion per year towards high-priority investments and $2 billion towards share buybacks, debt reduction, and asset acquisitions.
This apparently includes ENB’s recently announced deal to acquire Moda Midstream Operating LLC for $3 billion in cash, valued reasonably at 8x projected forward EBITDA. I see this acquisition as being rather significant for ENB’s future, as it advances its U.S. Gulf Coast export strategy and connectivity to low-cost and long remaining life reserves in the Permian and Eagle Ford Basins.
In addition, I’m encouraged to see that ENB’s long-anticipated Line 3 replacement project is completed and became operational this month. This project was quickly finished after ENB won a favorable court ruling in Minnesota, the only state where construction was not complete. Management anticipates Line 3 reaching full capacity during the fourth quarter, and has begun offering 620K bbl/day of crude capacity this month.
Of course, investing in energy midstream companies doesn’t come without risks, especially in today’s political and ESG-friendly environment. This is reflected by the state of Michigan’s efforts to shut down Enbridge’s Line 5 pipeline due to environmental concerns. The Canadian government just invoked a 1977 pipeline treaty with the U.S. in an effort to prevent Michigan from shutting it down, and it remains to be seen what the final outcome may be.
Risks aside, I continue to see value in ENB at the current price of $40.42 with an EV/EBITDA of 14.5. As seen below, this sits at the low end of ENB’s valuation range over the past 3 years outside of the early pandemic timeframe.
(Source: Seeking Alpha)
Meanwhile, ENB maintains a strong BBB+ rated balance sheet, with $301M in cash on hand, and management expects to exit 2021 with a debt to EBITDA ratio in the 4.5-5.0x range. Analysts have a consensus Buy rating, with an average price target of $46.71, and Morningstar has a fair value estimate of $44, and gives the stock a 4-star Buy rating. Last but not least, Seeking Alpha’s Quant gives ENB a Very Bullish Rating, as seen below.
(Source: Seeking Alpha)
Enbridge is a diversified energy midstream and infrastructure company that has a bit of everything, from fossil fuels transport, to its gas utility business, to renewable power generation. Same for investors, it gives off a strong dividend yield combined with a steady forward growth profile.
Looking forward, I continue to see reasons to be optimistic around this name, as it has a balanced slate of capital projects. Considering the currently low bond and dividend yields of the overall market, Enbridge may be the perfect way to bridge one’s income gap to a comfortable retirement.
This article was written by
I'm a U.S. based financial writer with an MBA in Finance. I have over 14 years of investment experience, and generally focus on stocks that are more defensive in nature, with a medium to long-term horizon. My goal is to share useful and insightful knowledge and analysis with readers. Contributing author for Hoya Capital Income Builder.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ENB either through stock ownership, options, or other derivatives. 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.
This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.
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