The energy sector is in a state of flux as the world works to shift from carbon fuels to cleaner alternatives. While some might like to see this happen quickly, that's just not how big energy transitions have played out historically.
In this slow-moving industry overhaul, Enbridge (ENB 0.34%) stands out for its yield, dividend consistency, and business transition plans -- all reasons why it is a must-own energy stock for dividend investors.
The core of the portfolio
Enbridge's primary business is moving oil and natural gas. This is vastly different from drilling for these fuels, which exposes a company and its investors to often volatile commodity prices. Enbridge basically gets paid a fee for the use of its pipes and other energy infrastructure. As such, it is a pretty consistent cash flow generator, which helps explain the 27 years worth of dividend increases, making it a Dividend Aristocrat.
The biggest contributor to the business is the company's oil pipelines, which account for roughly 58% of earnings before interest, taxes, depreciation, and amortization (EBITDA). These pipes span North America, notably connecting the Canadian Oil Sands to the rest of the region. That said, Enbridge expects this business to become less important in the future as it invests in other areas.
Notably, the company's natural gas operation is expected to keep growing. There are two pieces here. The first is a pipeline network, which represents 26% of EBITDA, and the second is a natural gas utility operation, which makes up 12%. Although an old story at this point, these assets were added to allow Enbridge to take advantage of the shift away from dirtier fuels, like coal and oil. Natural gas is expected to be a transition fuel.
Together, these three businesses make up 96% of Enbridge's EBITDA and tie it tightly to the demand for oil and natural gas. While ESG-conscious investors might find this problematic, the truth is that these fuels are likely to remain important for years, likely even decades, to come. That will provide Enbridge with the cash it needs to keep paying out dividends and growing the rest of its business.
Changing slowly with the times
Normally, after discussing 96% of a company's business, the story would be pretty much over. But that's not the case here because the remaining 4% of Enbridge's EBITDA comes from its clean energy investments. This is a business segment that's expected to keep growing in the future, with management earmarking around a third of its capital investment budget to things like wind and solar power over the next few years.
There are a few sizable offshore wind projects in development in Europe right now that make up the bulk of this investment. However, there are also smaller efforts that will be important as well, including Enbridge powering its own operations with solar and early investments in hydrogen and other still-emerging clean energy tech. Clearly, this is not a small side business that has little meaning to the overall company given the amount of capital allocation. Management wants to integrate this segment into a core part of the business model.
This brings the story back to carbon fuels. At one point, Enbridge was just an oil pipeline company. As it saw the world starting to shift toward cleaner natural gas, it invested in that space so it, too, could benefit from the transition. And now that management is seeing the emergence of clean energy sources like wind and solar, it is moving Enbridge in that direction as well. These are strategic changes that allow the company to adjust along with the world around it.
Not really out of step
Today's zeitgeist is basically "carbon energy is bad; clean energy is good." That's too simple a take on what is a globally complex need for energy. With a hefty 5.9% dividend yield backed by more than 25 years of annual increases, Enbridge has proven that it can change with the world. And while it looks behind the curve right now, given the small size of its clean energy business, it is working to keep changing by augmenting its renewable power operations using the reliable cash flows from its oil and gas infrastructure assets.
While you might not get many kudos at cocktail parties talking about Enbridge, you can quietly count on your fat dividend checks as you wait for the clean energy business to get big enough to brag about. Enbridge's history and stated goals suggest that's the long-term direction here.