Why I Couldn't Resist Buying More of This Top-Tier Dividend Stock

Canadian energy infrastructure giant Enbridge (ENB -1.26%) has quietly become one of the better dividend stocks in the market. The company has paid a dividend to its investors for more than 64 years and has increased it for the last 23. That puts it just two years shy of becoming a Dividend Aristocrat. And the company plans on joining that elite group: It has already announced plans to raise its payout at a 10% rate through 2020.

Enbridge's dividend is as good as they get. The company pulls in 96% of its cash flow from recurring sources like fee-based contracts, and it only pays out 65% of that money in dividends each year. Despite that rock-solid payout, Enbridge's stock fell more than 7% in the past week as the market took a tumble, which pushed its yield to an alluring 6%. It's a sale I couldn't resist, so I scooped up a few more shares of the pipeline company this week.

I tossed a few more shares of this top dividend stock into my cart this week. Image source: Getty Images.

A sale upon a sale

Enbridge's slide this week followed a lackluster performance in 2017 when shares slumped more than 7%. It's hard to justify this slide since the company is growing at a healthy clip. Through the third quarter of last year, available cash flow from operations (ACFFO), which is a proxy for free cash flow, leaped 37% to nearly 3.9 billion Canadian dollars ($3.1 billion) thanks to the acquisition of U.S. gas pipeline giant Spectra Energy. ACFFO per share went in the opposite direction, falling 16% through the third quarter, but only because the company issued a boatload of new shares to finance the Spectra Energy deal and expansion projects.

Those growth initiatives are expected to begin paying off this year, with the company anticipating that ACFFO per share will increase 15% versus last year (and 5% above 2016's level). Further, ACFFO per share should grow at a 10% annual clip through 2020, backed by CA$22 billion ($17.6 billion) of in-process growth projects. That said, with the stock selling off, the company's valuation has fallen to a dirt cheap level of about 10 times cash flow. That's well below the 12.1 average of pipeline stocks.

Cheap growth

To put Enbridge's valuation disconnect into perspective, let's compare it to two of the market darlings in the pipeline sector: ONEOK (OKE -1.08%) and Magellan Midstream Partners (MMP). Both currently fetch premium valuations of around 14 times cash flow. While it's hard to argue that the duo doesn't deserve to trade at a superior price to other pipeline stocks, it's not easy to explain why they are trading more richly than Enbridge. Its financial metrics and growth prospects are just as good, if not better:

Data source: ONEOK, Enbridge, and Magellan Midstream Partners.

As that table shows, Enbridge not only offers a higher yield but its dividend growth outlook is better than Magellan's and about even with ONEOK's. Further, it has a comparable credit rating, though it does have a weaker leverage ratio. However, that's because the company is in the process of financing a massive expansion program. As those projects enter service, leverage should naturally fall, with the company expecting it to be below 4.5 by 2020. Meanwhile, Enbridge has much more cushion on its dividend since it has a higher coverage ratio and gets more of its cash flow from predictable sources. Add it up, and Enbridge is every bit as good as those rivals. 

Taking advantage of the opportunity

Enbridge's sell-off amid the market meltdown took shares down to their lowest level in the past year even though the company's growth engine is about to reaccelerate in 2018. That's a buying opportunity I couldn't resist. While Enbridge's stock might continue falling in the near term while the market waits for its growth projects to bear fruit, I think that, eventually, its valuation will at least move closer to the peer group average. That recovery, when combined with the company's growing income stream, should provide me with a compelling total return in the years to come.