What should you look for in a dividend stock? Not only do you want an attractive, growing stream of regular income, but you also want your hard-earned money to be safe. Given the way energy stocks are trading, investors have rightly become skeptical about their prospects. A lot of smaller, leveraged names are struggling to survive and several have gone bust. However, there are companies with diversified operations that have sustainable growth paths. Let's see why Enbridge (ENB -0.08%) is one of them.
Stable cash flows
Enbridge generates its earnings from its vast and diversified midstream assets. While its liquids pipelines segment is the main revenue generator, earnings from regulated gas transmission and distribution operations provide a layer of stability when liquids earnings fall. This happened in the latest quarter. Lower oil prices and volumes caused a 5% drop in Enbridge's liquids pipelines segment. However, its gas distribution and storage earnings soared due to higher rates and new customers. Overall, Enbridge's adjusted earnings fell by $163 million Canadian dollars to CA$961 million for the quarter, mainly driven by lower liquids volumes and lower differentials-based earnings in its energy services segment.
Still, the company expects to meet its full-year distributable cash flow guidance range for 2020. Enbridge could achieve it, thanks to its predominantly resilient earnings and cost savings in response to the COVID-19 pandemic.
Not only are Enbridge's existing assets generating stable cash flows, but the company is also well-positioned to continue growing its earnings. Enbridge is working on several growth projects, and it expects to spend roughly CA$5 billion on them through 2022. Together with its recently completed projects, they should fuel Enbridge's earnings over the next several years. Enbridge expects to grow its distributable cash flow (DCF) per share by 5% to 7% through 2022.
Enbridge's dividend track record is remarkable. The company has increased its dividend for 25 consecutive years. That makes it a Dividend Aristocrat, though it doesn't appear on the S&P Dow Jones Indices' list as it's a Canadian company and not a part of the S&P 500 Index. Its average annual dividend growth rate over this period is a notable 11%.
Enbridge targets a payout ratio below 65% of its DCF. Based on the midpoint of its 2020 DCF guidance, its payout ratio for the year would be around 70% -- only slightly higher than its target.
Not only is the company's dividend growth over the years impressive, but it is also well supported by its cash flow. Management intends to keep it this way.
Balance sheet strength
In tough times like the current year, balance sheet strength could well be the deciding factor between companies that survive and companies that go bankrupt. Enbridge expects its debt-to-EBITDA ratio to remain within its target range of 4.5 to 5 times for the year 2020. That is considered reasonable for midstream operators. Further, at the end of Q3, Enbridge had CA$14 billion of liquidity available, sufficient to meet its funding needs through 2021.
Notable renewables portfolio
Fossil fuels are expected to continue to be a key energy source over several decades. At the same time, the share of renewable sources of energy is expected to increase as it meets rising global energy needs. In addition to fossil fuels, Enbridge is focusing on renewable energy, which could become a material revenue generator for it over time.
In the first nine months of 2020, Enbridge's renewable power generation segment generated adjusted EBITDA of CA$361 million. Though that accounted for just nearly 4% of Enbridge's EBITDA, it positions Enbridge for a transition toward a lower-carbon future.
A great dividend stock
Enbridge stock is off more than 30% from its highs this year. The stock is trading at an alluring yield of 8.3%, way higher than what it offered historically. Recovering demand for oil and gas coupled with reduced exploration and production activity should be bullish for oil and gas prices.
Further, the longer-term outlook for fossil fuels to meet rising global energy needs is encouraging. With a strong coverage and reasonable leverage, the company looks well placed to weather any near-term volatility while maintaining its payouts. All of this makes Enbridge a great addition to your income portfolio.