This 7.4%-Yielding Dividend Stock Has Plenty of Fuel to Keep Growing

The oil industry has been a brutal place in recent years. Crude price volatility has led oil producers to drill fewer wells, which has impacted the volumes flowing through North America's pipeline networks. While that has hurt some midstream companies, it hasn't affected Canadian energy infrastructure behemoth Enbridge (ENB 0.69%) because its rate structure insulates it against fluctuations in commodity prices and volumes. As a result, its fourth-quarter results were solid, with  earnings before interest, taxes, depreciation, and amortization of 3.201 billion Canadian dollars. This is an energy company that has plenty of fuel to continue growing its cash flow and high-yielding dividend.

Drilling down into Enbridge's fourth-quarter earnings

Data source: Enbridge. pp = percentage points. (NOTE: All figures in Canadian dollars. Current exchange rate $0.78=CA$1.00)

Enbridge's earnings and cash flow both grew during the fourth quarter. That helped nudge its full-year totals above 2019's levels, with adjusted EBITDA marginally higher and DCF rising by about 2%. That was a solid result considering that most midstream companies' earnings declined last year due to all the turbulence in the oil market.

Enbridge had the advantage of operating a diversified energy infrastructure business; stronger results from its liquids pipelines and its renewable energy segment helped offset the weaknesses in its other business units:

Data source: Enbridge. Chart by the author. (NOTE: All figures in Canadian dollars. Current exchange rate $0.78=CA$1.00)

Earnings from its liquids pipelines rose nearly 4% during the fourth quarter and by 2% for the full year. The company benefited from higher tolls and surcharges on some systems, and lower costs, which more than offset lighter deliveries on its Mainline pipeline and other systems.

While earnings from its gas transmission and midstream assets slumped by 7.4% during Q4, they were up by 0.7% for the full year. A capacity restriction on its Texas Eastern system and an asset sale weighed on its results for the quarter, partially offsetting the benefits of higher rates and new assets placed into service.

Gas distribution and storage earnings rose by 2.3% during the fourth quarter and by 0.2% for the year. Enbridge benefited from customer growth, rate increases, and cost savings, which helped offset the impact of warmer weather.

Earnings from renewable power generation surged by 22.7% during the fourth quarter and 19.6% for the year. Powering this growth were the contributions from the Hohe See and Albatross offshore wind farms in Europe, and stronger wind resources driving energy production upward at its onshore facilities in North America.

Finally, Enbridge's energy services business posted losses both for the quarter and the year. The company faced several headwinds, including narrower commodity price differences between production basins and market centers, and unused storage and pipeline capacity.

Image source: Getty Images.

A look at what's ahead for Enbridge

Enbridge is in the midst of a CA$16 billion ($12.6 billion) expansion program that it expects to complete by 2023. The company recently finished CA$1.6 billion ($1.3 billion) of those projects and expects to place a total of CA$10 billion ($7.9 billion) of new assets into service this year, including the U.S. portion of its Line 3 Replacement Project and the T-South expansion. In light of all that, the company believes it will generate between CA$13.9 billion to CA$14.3 billion ($10.9 billion to $11.2 billion) of adjusted EBITDA this year, with DCF per share in the range of CA$4.70 to CA$5  ($3.69 to $3.92). Hitting the midpoints of these forecast ranges would result in growth rates of 6% and 3.9%, respectively.

Meanwhile, the company anticipates that its earnings and cash flow will continue growing in 2022 and 2023. It sees DCF per share expanding at a 5% to 7% annualized rate. Fueling this growth will be the completion of its current expansion project backlog (which includes two more offshore wind farm developments in Europe) and other internal growth drivers like rising rates, productivity enhancements, and capacity optimizations. That should give Enbridge the fuel to continue increasing its dividend, which it has done in each of the last 26 years.

Looking further ahead, Enbridge estimates that after covering its growing dividend, it will have CA$5 billion to CA$6 billion ($3.9 billion to $4.7 billion) of financial capacity left each year to deploy in further efforts to boost shareholder value. The company estimates that it will invest CA$3 billion to CA$4 billion ($2.4 billion-$3.1 billion) per year on expansion projects, including modernizing its utility and gas transmission businesses, and constructing additional renewable energy projects. Meanwhile, the company could utilize the remaining CA$2 billion ($1.6 billion) of financial capacity on share buybacks, acquisitions, additional organic expansion projects, or debt reduction. This balanced approach could yield continued DCF per share growth in the range of 5% to 7% per year.

An ideal stock for yield-seeking investors

Enbridge proved the durability of its business model last year. Because of that, income investors can rest easy knowing its big-time dividend payouts are on solid ground. Further, Enbridge has plenty of fuel to continue increasing its payouts, with future expansions increasingly focused on cleaner power sources like natural gas and renewable energy. Because of that, Enbridge looks like an ideal income stock to buy and hold for the long term.