Canadian energy-infrastructure giant Enbridge (NYSE:ENB) continues to generate very stable cash flow despite all the turmoil in the oil market. That was evident in the third quarter as its cash flow was down ever so slightly from last-year's level. That has it on track to achieve its full-year forecast and keep its 8%-yielding dividend on solid ground.

Drilling down into Enbridge's third-quarter results

Metric

Q3 2020

Q3 2019

 Change

Adjusted EBITDA

$2.997 billion

$3.108 billion

(3.6%)

Distributable cash flow (DCF)

$2.088 billion

$2.105 billion

(0.8%)

DCF per unit

$1.03

$1.04

(1%)

Dividend payout ratio

79%

71%

11.3%

Data source: Enbridge. Chart by author. NOTE: All figures in Canadian dollars. Current exchange rate CA$0.77=$1.00. EBITDA = earnings before interest, taxes, depreciation, and amortization.

Enbridge benefited from its diversified portfolio as growth in its gas distribution and storage segment helped offset weaker results in its liquids pipelines segment:

Enbridge's third-quarter results by segment in 2019 and 2020.

Data source: Enbridge. Chart by the author.

Earnings from liquids pipelines declined by 5% due to lower volumes on its Canadian mainline system and some of its U.S. oil pipelines because of lower oil prices. Meanwhile, the other weak spot was Enbridge's energy service operations, where it reported a loss. That was due to narrowing price differences between oil basins and market centers and unused contracted storage and pipeline capacity.

The company offset most of that weakness by posting stronger results in its natural gas and renewable energy segments. Gas distribution and storage earnings jumped 23.5% due to customer growth, higher rates, and cost savings by merging two of its gas utilities. Meanwhile, the company's earnings from renewable energy rose more than 13%, thanks to the recent completion of the Hohe See and Albatros offshore wind projects in Europe.

A person holding out their hand with the word dividends above and an arrow sloping upward.

Image source: Getty Images.

A look at what's ahead for Enbridge

Enbridge's solid third-quarter results have the company on track to deliver full-year distributable cash flow near the midpoint of its CA$4.50 to CA$4.80 per-share guidance range. While the company is facing some headwinds from lower volumes, weaker energy-services results, and a distribution cut from its ownership stake in MLP DCP Midstream, it's offsetting them thanks to its cost-reduction initiatives and lower interest rates on its debt.

Given that outlook, Enbridge is on track for a dividend payout ratio of less than 70% of its cash flow this year. That enabled it to retain more than CA$4 billion in cash, which helped cover most of the CA$5.5 billion it invested into capital projects. It funded the balance with CA$400 million of asset sales and by issuing CA$1.4 billion in hybrid securities like preferred shares. That enabled it to maintain a strong investment-grade balance sheet.

Enbridge currently expects to grow its distributable cash flow by 5% to 7% per share through 2022. That should support continued dividend growth, given that the company's payout and leverage ratios are within its target ranges of 60% to 70% and 4.5 to 5 times debt-to-EBITDA, respectively. Fueling that growth is the CA$11 billion of expansion projects in its backlog, which includes a mix of liquids and gas pipelines, gas utility expansions, and new renewable energy developments.

While fossil fuels are Enbridge's main power source at the moment, renewables are becoming an increasingly important part of its business mix. The company is currently building two new offshore wind farms in Europe and expects to approve construction on a third one next year. It also recently completed its first solar power gas-compression system in Texas, which will be the first of many self-power projects the company develops in the coming months. Meanwhile, it has several renewable natural gas and hydrogen projects in development as it positions its business for the energy transition.

A well-powered dividend

Enbridge continues to generate solid results despite the turbulent conditions in the oil market. That's due to its diversification and low-risk business model backed by long-term contracts and regulated rates. Because of that and its strong financial profile, Enbridge's 8%-yielding dividend is on solid ground. Meanwhile, with plenty of growth ahead, it has plenty of power to keep growing that payout, which it's done in each of the last 25 years.

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