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Is Enbridge Stock a Buy?

By Reuben Gregg Brewer - Apr 19, 2021 at 8:13AM

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This oil pipeline giant thinks it's got a bright future even as the world shifts toward lower-carbon energy sources.

Canadian midstream giant Enbridge (ENB 0.95%) is offering investors a hefty 7.1% forward dividend yield today. And that yield is backed by 26 years of annual dividend increases. Those two facts should attract the attention of most dividend investors, but there's so much more to know about the company. Here's why income focused investors should consider buying Enbridge today.  

More than oil

Roughly 54% of Enbridge's earnings before interest, taxes, depreciation, and amortization (EBITDA) comes from its massive oil pipeline network. The company estimates that it carries around 25% of all North American oil and has more pipes (by miles) than any of its peers. Its system spans from Canada all the way to Mexico. There is no question that oil is a very important commodity for this midstream giant. However, there is still another 46% of the business to know about.   

A man turning valves on an energy pipeline.

Image source: Getty Images.

The second-largest segment at Enbridge is its natural gas pipelines, at 29% of EBITDA. Roughly 20% of North American natural gas passes through its system and it is No. 2 by miles of pipe. In addition to natural gas pipelines, it also owns a natural gas distribution business. This utility operation makes up 14% of EBITDA and is, according to Enbridge, the largest in its niche by volume delivered. The remainder of the business, a tiny 3% of EBITDA, is energy, which is largely made up of renewable power assets. 

The bigger picture here is that starting as far back as 1996, Enbridge began using its strong foundation in oil to bulk up in less carbon-intensive areas. In fact, it built its first wind farm in 2002, so even in its smallest segment it has nearly 20 years of experience under its belt. The goal has been a mixture of diversification and adapting to the world around it. So Enbridge, while rooted in the oil space, is positioned to benefit as the world goes green. 

Plenty of growth ahead

The key to this story, however, is that oil isn't out of the energy mix and likely won't be for years to come. As long as the world still needs oil, someone will have to move it. So Enbridge's cash cow continues to throw off plenty of money that it can use to invest.

On that score, Enbridge believes it will be able to spend between $3 billion and $4 billion a year on capital projects for the foreseeable future. That will include investments in the oil space, of course, but also more rapid growth in the renewable power sector, as well.

For example, it has a number of offshore wind developments in Europe in its backlog and plans to build solar plants to help power its own pipelines. As for natural gas, Enbridge thinks the long-term investment opportunities there are more than twice what exists in its oil business. So clean energy and natural gas, a fuel that should help the world transition to clean energy, will likely grow more quickly than its legacy oil business in the years ahead.    

All of this opportunity, meanwhile, should translate into growth. Specifically, Enbrige believes that it can increase its distributable cash flow between 5% and 7% a year. Dividend growth should track along with that, though perhaps at a slightly lower level. The interesting thing here, however, is that you can add that growth together with the current dividend yield and create a rough estimate of shareholder return, which would be a very generous 12% a year at the low end. Clearly, Wall Street will dictate what the stock price is at any given moment, but if Enbridge can follow through on most of its future plans, which it has done fairly well historically, there's a strong growth engine that suggests investors won't abandon the stock.   

ENB Dividend Yield Chart

ENB Dividend Yield data by YCharts

Meanwhile, the current forward 7.1% yield is toward the high end of the company's historical yield range. Clearly there are multiple reasons for this, including the oil downturn spurred by the coronavirus pandemic and the global attitude shift on carbon fuels (which Enbridge is clearly aware of and adjusting to). But the yield today, coupled with the company's evolving business, suggests that value conscious investors and dividend investors should like what they see here. 

I bought it...

There are negatives to the Enbridge story, such as its relatively heavy use of debt (which is a long-standing trend). But no stock is perfect and, when I stepped back and dug in, I thought the positives outweighed the negatives. In other words, I not only think Enbridge is a good stock for you to look at today, but I thought highly enough of it to add it to my own portfolio, too. 

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