Enbridge: High-Quality 7.3% Midstream Yield Available For Sale
Summary
- Enbridge is a well-run midstream company with a solid dividend yield of 7.3%. The drop translates to an attractive buying opportunity for dividend investors.
- The company has stable cash flow due to its contracted cash flows. Enbridge confirmed its financial outlook for FY 2023.
- Enbridge faces risks related to regulatory headwinds in the fossil fuel industry, which could impact expansion projects and future growth.
- I believe the firm's 'Dividend Aristocrat' premium is deserved.
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Enbridge (NYSE:ENB) is a well-run midstream firm whose shares have recently fallen to a new 2023 low. On the drop, I believe Enbridge is a very attractive dividend investment for investors. Enbridge is a Dividend Aristocrat and has paid a growing dividend for 28 years. The company’s first-quarter earnings card was also solid with high single digit adjusted EBITDA growth year over year and the midstream company confirmed its financial outlook for FY 2023 as well. Enbridge's shares are very attractively valued on the drop and I have used the opportunity to buy the 2023 lows!
Pipeline and storage portfolio, predictable cash flows
Enbridge is a diversified midstream company with liquids pipelines, natural gas delivery systems, storage facilities and a growing portfolio of on/offshore windfarm assets. Enbridge also delivered strong results for the first-quarter that I only want to touch on quickly. The company generated $4.5B in adjusted EBITDA, showing 8% year over year growth. Enbridge translates a big portion of this EBITDA into distributable cash flow which closed in on $3.2B in Q1'23.
Source: Enbridge
Enbridge generates the majority of its revenues from contracted delivery contracts that reduce the impact of price changes for energy products in the market. This results in an exceptionally high degree of cash flow predictability and a dividend that has a low risk of getting cut.
LNG export opportunity
Enbridge is a leading midstream company with extensive pipeline networks in the United States and Canada and it has a huge growth opportunity in the U.S. Gulf Coast... which is an export center for liquified natural gas. The midstream company has said that it expects 30% growth in LNG export volumes, growth that is expected to come from expansion projects such as the Rio Bravo Pipeline. The Rio Bravo pipeline is expected to transport 4.5B cubic feet per day of natural gas from Agua Dulce in California to Brownsville in Texas.
Source: Enbridge
Financial outlook for FY 2023 confirmed, mid-to-high single digit growth in EBITDA, DCF
Enbridge has guided for $15.9-16.5B in adjusted EBITDA for FY 2023 earlier this year and the guidance range was confirmed when the company released first-quarter earnings. The midstream company also expects distributable cash flow in a range of $5.25-5.65 which is also unchanged from the company’s prior outlook. The distributable cash flow forecast implies approximately 5% year over year growth.
Source: Enbridge
Enbridge’s yield, valuation vs. other midstream firms
Enbridge’s share price has fallen to a new 2023 low last week which I used to my advantage and added to my small holding. I believe the drop creates an attractive buying opportunity for dividend investors that want to buy a Dividend Aristocrat (those companies that raise their dividends for 25 years straight) at a decent price. Enbridge is a Dividend Aristocrat because the company has raised its dividend for 28 years and delivered 5% dividend growth since 2019. Enbridge pays out approximately 60-70% of its distributable cash flow so the company retains a lot of cash flow to invest in a diverse set of expansion projects.
Source: Enbridge
With a confirmed outlook in place and 5% DCF growth expected for FY 2023, Enbridge’s dividend yield of 7.3% looks solid to me. Based off of adjusted EBITDA, shares of the midstream firm are valued at 11.7X forward EBITDA which is slightly more expensive than the Enterprise-Value-to-EBITDA ratio of U.S.-based companies such as Kinder Morgan (KMI), Enterprise Products Partners (EPD) or Energy Transfer (ET). However, Enbridge deserves a Dividend Aristocrat premium and I am willing to pay such a premium if it means that the dividend will continue to grow going forward.
Risks with Enbridge
Enbridge is a fossil fuel-focused energy company which does a considerable amount of business in crude oil and gas… which exposes the company to regulatory headwinds in the context of a broader transition of the energy system. A shift towards alternative energy sources could benefit the company's exposure to on/offshore windfarms but also hurt its core fossil fuel business. Regulatory limits on expansion projects, especially regarding Enbridge’s pipeline system, could result in lower EBITDA and distributable cash flow growth going forward.
Final thoughts
Enbridge is a well-run midstream firm that generates the majority of its revenues from contracted arrangements with its customers… which translates into predictable cash flow that support the company's growing dividend. Enbridge confirmed its FY 2023 financial outlook and continues to expect high-single digit EBITDA and mid-single digit DCF per-share growth, and the company’s dividend is likely to grow in line with Enbridge’s distributable cash flow growth. I believe last week's drop to new 2023 lows is not deserved given that the midstream firm confirmed its financial outlook. While shares are trading at a premium to other midstream firms, I believe the aristocrat premium is well-deserved!
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ENB, EPD, KMI 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (14)
20% of all USA nat.gas is transported by ENB
34Tcf x.2 = 7 Tcf per year?
3 million bpd carried on ENB Mainline = oil
Obviously ENB doesn't charge enough for its services...
after 3 year of haggling... Mainline Settlement is finally settled for Pennies per Barrel??? hoping to see some numbers in Q2... but sadly ENB says... maybe Q3 will have something from the Settlement. It's tough to see Billion$ spent on Windmills / Solar that doesn't make its system of pipelines any safer, robust or Profitable... where's the vertical integration? Green Power boon-doggle... in Europe?