Bull markets are times of investor exuberance, which is exciting. But investors need to remember that bulls eventually get attacked by bears. Unless you are a market timer (a difficult-to-follow investment approach), it is probably best to focus your attention on stocks that are worth owning in good markets and bad ones.
Enbridge (ENB -1.21%) is just such a stock.
The core of the business
Enbridge is classified as a midstream company. It owns physical assets, like pipelines, that help move oil and natural gas from where they are extracted to where they are consumed and/or processed.
This is largely a fee-based operation, which means the company is being paid for the use of its assets. The price of oil and natural gas isn't all that important to its revenue generation. Demand for the fuels, which is still high, is the driving force on its top and bottom lines.
Image source: Getty Images.
That said, Enbridge isn't just a midstream company. It also owns a natural gas distribution business and is building a renewable power operation. The gas utility it owns is regulated so it, too, provides consistent cash flows. The renewable power assets are backed by long-term contracts, which means they provide consistent cash flows as well. All in, Enbridge ends up being a pretty boring and reliable company.
Evidence of that shows up in the dividend. The yield is an enticing 7.1% today, but for many investors, the more attractive number will be 28. That's the number of consecutive years that the dividend has seen an annual increase. Over the past decade, meanwhile, the dividend has grown at a respectable 8% annualized rate.
There's a caveat here, since Enbridge is Canadian. The dollar value of the dividend that U.S. investors receive will vary along with currency exchange rates. Still, the trend is for steadily higher payments backed by a reliable business.
But why should you buy Enbridge stock if there's a bull market? Here are three reasons.
1. Enbridge's dividend helps it maintain equilibrium
The historical return of the stock market normally hovers around 10% or so, on average. Some years are better and some are worse. But consider that 7.1% dividend yield from Enbridge in context of the average stock market return. Basically, the dividend gets you awfully close to the market's return. Don't underestimate the benefit this can have on performance.
Over the past three years, Enbridge's stock price has increased by around 24%. But when you look at total return, which assumes dividend reinvestment, the gain increases to more than 50%. That big dividend provides a huge boost to investor returns, which will be just as true in a bull market as in a bear market.
2. Enbridge can change with the times
Companies that don't adjust over time are highly likely to go the way of the buggy whip. Enbridge, for example, is keenly aware of the shift toward lower-carbon energy options. It is making the transition along with the world around it.
For example, in 2016 the company generated 74% of earnings before interest, taxes, depreciation, and amortization (EBITDA) from oil pipelines. That's down to around 50% or so now, with natural gas, a cleaner alternative to oil, growing from a revenue share of 25% or so to roughly 45% (combining pipelines and the utility operation). The last sliver in there is renewable power, which is somewhere near 5%.
What's equally important here, however, is that Enbridge believes its portfolio has around $5 billion per year of capital investment opportunities built into it. So the company continues to adjust and change with the times as it spends on projects that will largely take place regardless of the market environment.
3. Enbridge is hard to replace
The last reason to like Enbridge is that its portfolio of vital infrastructure assets would be hard to replace, if not impossible. That provides protection in a bear market, since companies will still have to use the company's pipelines. But it is also a layer of protection in a bull market.
Indeed, when animal spirits are running high on Wall Street, companies often hit the gas on expansion efforts. But midstream assets are increasingly difficult to build, and most of the best locations have already been built on.
So Enbridge's existing portfolio is somewhat protected from new entrants. At the same time, however, the company has the scale to drive long-term growth projects through the often-complicated hoops that must be cleared to get something built today. A lot of its effort is focused on expanding existing infrastructure to increase the cash flows it generates. Once again, bull or bear market, Enbridge is well positioned.
Desirable all around
If there's a bull market coming (some might argue one is already here), Enbridge looks like it will reward investors well based on its high yield and strong cash-generating business. And if there's a bear market, it should continue to perform well for them, too.
This really means that dividend investors looking for a reliable high-yield stock will probably like Enbridge today no matter what happens in the market from here.
