Shares of Enbridge (NYSE:ENB) have declined by about 15% over the past year. While 2020 was a rough one for the energy market, the Canadian energy infrastructure giant's financial results held up remarkably well as it expected to achieve its original cash flow forecast, so its stock trades at a much lower valuation. It's so cheap that it's getting too good to pass up, especially when adding its high dividend yield and growth potential.  

Rock-solid amid a turbulent year

Enbridge prides itself in having a low-risk business model built to withstand the oil market's volatility. The company demonstrated its durability last year. Through the third quarter, earnings were roughly in line with 2019's total despite significant headwinds in the oil market because of the COVID-19 outbreak. That had the Canadian company on track to deliver full-year results near the mid-point of its initial guidance range of CA$4.50 to CA$4.80 per share ($3.53-$3.77 per share), about 2% ahead of 2019's tally. With cash flow growing and its stock price sliding, Enbridge now trades at a much cheaper valuation than it did at this time last year. 

A hand drawing a scale with the words price and value on it.

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Enbridge delivered results within its initial guidance range despite facing some headwinds. These included declining volumes on its Mainline pipeline, reduced energy services volumes, and less income from its investment in DCP Midstream (NYSE:DCP). However, it more than offset these issues thanks to cost reductions, a stronger U.S. dollar, lower interest rates, and higher rate settlements on some of its government-regulated assets.

More growth ahead despite continued headwinds

The oil market remains fragile because of the COVID-19 outbreak, which will likely keep the near-term pressure on Enbridge's operations. Meanwhile, it's facing a longer-term headwind from the energy transition as the global economy pivots toward renewable energy.

However, Enbridge still has a lot of growth ahead, thanks to its dominant infrastructure position in North America. The company currently has CA$16 billion ($12.6 billion) of secured expansion projects -- with CA$10 billion ($7.8 billion) of remaining capital spending -- that should come online through 2023. This backlog should fuel 5% to 7% annual cash flow per share growth during that timeframe. While the bulk of those current projects are new oil and gas pipelines and expansions at its natural gas utilities, Enbridge has also started making inroads into renewable energy by investing in offshore wind farm developments in Europe. 

In addition to that secured growth, Enbridge has many other development projects in the pipeline, including new renewable energy opportunities. The company should therefore have plenty of fuel to continue growing post-2023. Meanwhile, it has ample financial flexibility to finance future growth thanks to its investment-grade balance sheet and reasonable dividend payout ratio. Overall, Enbridge estimates that it has the flexibility to self-finance CA$5 billion to CA$6 billion ($3.9 billion-$4.7 billion) of expansion projects per year. 

A bottom-of-the-barrel valuation

Usually, a financially strong company with clearly visible growth prospects will trade at a premium price. However, that's not the case with Enbridge. As noted, its stock has declined by more than 15% over the past year. As a result, it currently trades at less than $35 a share. Meanwhile, the company anticipates that its cash flow will continue growing. It's forecasting a range of CA$4.70 to CA$5.00 per share ($3.69-$3.92) for 2021. Thus, it sells for roughly nine times its projected 2021 cash flow at the midpoint. That's cheap since companies with high-quality real assets (real estate, infrastructure, etc.) tend to trade at a mid-teens multiple of their cash flow. It's even cheaper when considering the current stock market, which many believe is getting overheated following a huge run-up since bottoming out last March.

Strong total return potential even if it stays cheap

Enbridge trades at a more than 50% discount to where it should, given the quality of its assets and balance sheet. While some of that's due to its focus on fossil fuels, it's slowly transitioning to cleaner sources, which the market hasn't yet factored into its valuation.

However, even if the market doesn't ever give Enbridge any credit for this transition or its business model's durability, investors could potentially earn strong total returns. That's because it offers a more than 7%-yielding dividend and expects to deliver 5% to 7% annual cash flow growth. Add that up, and Enbridge could produce 12% to 14% total annual returns from here with no valuation improvement. Meanwhile, the returns could be even bigger if investors start rewarding it for its ability to continue growing despite all the headwinds facing the energy sector.


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.