Enbridge (ENB 1.09%) is offering a sizable 6.7% dividend yield today. The dividend has been increased annually for 27 consecutive years, putting the company in the Dividend Aristocrat space. But that record doesn't mean you should just accept that the Canadian midstream giant can keep up this impressive streak. It can, but here's why you can be confident in that fact.
1. Boring business
The core of Enbridge's business is its oil and natural gas pipelines, which make up 58% and 26% of earnings before interest, taxes, depreciation, and amortization (EBITDA), respectively. These midstream operations are fee based, so demand for oil and natural gas is more important than commodity prices, which tend to be volatile. In addition to these businesses, Enbridge also operates a natural gas utility business (12% of EBITDA) and a growing clean energy portfolio (4%). The utility business is regulated and the clean energy portfolio is driven by long-term contracts. Basically, Enbridge's business is extremely consistent and extremely boring. But that's a good thing when it comes to supporting a dividend, since energy-price volatility isn't a big worry here.
2. Preparing for the future
Now, that tiny 4% of EBITDA clean-energy portfolio is perhaps the most interesting aspect of the company today. It shows Enbridge is working to adjust along with the world around it, which will help ensure it can keep paying its dividend over the long haul. But this division isn't likely to stay so small for long, given that roughly a third of the company's capital-spending plan is earmarked for this division right now. Step back and think about that: 4% of the business is set to get one third of the capital spending. Enbridge is clearly looking to grow quickly in this space to keep pace with the world's clean energy zeitgeist.
3. Strong financials
Meanwhile, Enbridge has an investment-grade-rated balance sheet. That means it has a sound financial foundation to support its business and growth investment plans. Its financial debt to EBITDA ratio, meanwhile, is right in line with its peers, so there's no reason to think it is a greater financial risk than any of its closest competitors. Meanwhile, Enbridge's distributable cash flow payout ratio is expected to be around 65% in 2022. That's right smack in the middle of management's 60% to 70% target. Those are solid numbers all around.
ENB Financial Debt to EBITDA (TTM) data by YCharts.
4. And that extra cash
But the real number to consider here is $2 billion. That's the excess cash flow Enbridge expects to generate above its dividend and capital spending plans. Right now, it is using most of that money to buy back stock, but it could easily go toward acquisitions or more internal growth projects. The company could also pay down debt, allowing it to avoid having to pay higher rates to roll over maturing debt. All three would help to increase cash flow in the future. More directly, some of that excess cash could be used to pay dividends or to protect the current payout if there's some market adversity in the near future.
Having too much money isn't necessarily a great thing, but it does suggest the dividend has an extra layer of safety built in. For conservative dividend investors, that could be pretty attractive during an otherwise difficult stock market environment. Note that the company's dividend is paid in Canadian dollars, so the amount that U.S. investors receive varies along with exchange rates.
No problems here
When you add it all up, Enbridge's dividend not only looks secure today, but it also looks like there's a very good reason to expect dividend growth to continue in the future. If you're trying to find a high-yield energy investment right now, this Canadian midstream giant might be a good solution.
