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Is Enbridge Inc. a Buy?

By Matthew DiLallo - May 31, 2018 at 9:46AM

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The Canadian energy infrastructure giant has a lot to offer investors.

Enbridge (ENB -0.23%) has hit a rough patch in recent years. While cash flow and its dividend have continued rising, shares have slumped about 20% since the start of 2018 and are down more than 40% from their peak in 2015. Because of that, Enbridge's valuation has declined to a very inexpensive level, which when combined with a steady stream of dividend increases, has pushed its yield up to an eye-catching 6.7%. That high yield for a cheap price makes Enbridge look like a compelling stock to buy, especially considering all the growth it has coming down the pipeline.

An excellent income stream

Enbridge has been a dream stock for income investors throughout its history. Not only has the company paid a dividend for the past 64 years, but it has increased the payout every year for the last two decades by an 11.7% compound annual growth rate.

Two people holding signs with arrows pointing up and down with buy and sell written above them.

Image source: Getty Images.

The company supports its current dividend with very stable and predictable cash flow since 96% comes from long-term, fee-based contracts or similar rate structures. Meanwhile, the company only pays out 65% of its cash flow in dividends, leaving it with significant excess cash to invest in growth projects. Finally, Enbridge has a solid investment-grade balance sheet, which provides it with the financial flexibility to fund expansions. While its leverage ratio is higher than the company would like at the moment, it recently sold several noncore assets, which will help improve its financial profile going forward.

A bottom of the barrel price

Enbridge's currently elevated leverage level is one of the weights that caused its stock to tumble over the past year. Because of that sell-off, shares trade at just nine times cash flow. That makes it one of the cheapest stocks in its peer group where the average company trades at about 12 times cash flow.

That near bottom of the barrel valuation is getting harder to justify given the progress Enbridge has made in recent weeks to address the issues that have been weighing it down. As noted, the company made quick progress on its asset sale plan, putting it well on its way to hitting its leverage target by year-end. Furthermore, it might exceed its goal since it has received strong interest from potential buyers for some other assets that it could sell to create more financial flexibility. In addition to that, the company recently addressed another concern by offering to acquire all its publicly traded entities, which would reduce complexity, enhance its credit profile, and provide it with more retained cash flow to fund expansion projects.

Lots of growth coming down the pipeline

Enbridge has focused a lot of attention recently on improving its financial profile because it has 22 billion Canadian dollars' ($16.9 billion) worth of growth projects underway that it needs to finance over the next few years. That's one of the largest expansion backlogs in the sector and positions Enbridge to grow cash flow per share at a 10% compound annual rate through 2020, which would support a similar growth rate in the company's dividend over that time frame.

In the meantime, the company continues to develop new projects that have the potential to drive growth beyond 2020. It's working on a CA$2 billion ($1.5 billion) pipeline project to move natural gas from western Canada to the U.S., and it has the option to buy a stake in the Grey Oak Pipeline, which will transport oil out of the fast-growing Permian Basin to markets along the Gulf Coast. Those are just some of the many new project opportunities it's pursuing to extend its growth outlook beyond 2020.

A rare trifecta for investors

Enbridge currently offers investors a unique opportunity to lock in a rock-solid high-yield dividend that it's on pace to increase at a fast pace, all for a cheap price. It's a compelling combination that positions the company to create significant value for investors in the coming years, which is why I think the stock is an excellent one to consider buying right now.

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