Sometimes a boring company that consistently pays out its growing free cash flow is something to get excited about. That's especially true when there's a clear path to continued dividend increases.
One such company offering an exceptional dividend is Enbridge (ENB +0.39%). The Canadian pipeline company just announced another raise for shareholders in 2024, bringing it to 29 straight years of dividend increases. The payout increased just over 3% and now yields about 7.7%.
There's a lot to like about the stock at today's price. And investors should expect even more dividend increases for years to come.
An income stream that can easily beat inflation
One of the most attractive factors for Enbridge is that 80% of its earnings are protected against inflation. That means its annual dividend increases should have no problem keeping up with the cost of living.
Most of the company's assets are highly regulated. So, while that can put a cap on what Enbridge can charge customers, it also provides predictable inflation-protected rate increases. Indeed, management has put a major focus in acquiring more "utility-like" assets over the last few years, and it's making a big increase in actual utilities with the acquisition of three properties from Dominion.
As a result, management expects steady improvements in earnings and cash flow in 2024 across all four of its major segments.
| Segment | EBITDA Growth Guidance |
|---|---|
| Liquids pipeline | $300 million |
| Gas transmission & midstream | $400 million |
| Gas distribution & storage | $150 million |
| Renewable power | $100 million |
Data source: Enbridge. EBITDA = earnings before interest, taxes, depreciation, and amortization.
On top of rate increases, growth will be driven by several factors: higher utilization for its pipelines; and its 2023 acquisitions of Morrow Renewables, Aitken Creek, and Tres Palacios for its gas transmission business and the benefits of scale that come with it. And several projects and acquisitions in its burgeoning renewables business will boost profits next year.
The addition of the gas utilities from Dominion provides more upside to Enbridge's guidance, but likely won't have a major impact on the business until 2025.
Enbridge also plans to refinance about $7 billion of debt next year, which will result in higher interest expenses for the business. Still, the company's inflation-protected assets should position it well to absorb the higher interest cost.
NYSE: ENB
Key Data Points
Slow and steady
Enbridge's dividend payout sits right in the middle of management's goal of 60% to 70% of distributable cash flow (DCF). And with its increased focus on utility-like assets, that DCF is set for steady growth for the foreseeable future. That should translate into those annual dividend increases for shareholders.
For the midterm, management expects to be able to add around 3% per year to its DCF. It faces modest near-term headwinds from higher interest expenses and some timing of capital expenses to maintain its assets. As such, investors can expect cash flow to closely match Enbridge's EBITDA growth in the long run.
Management sees EBITDA growing around 5% annually for the foreseeable future with DCF growing right in line post-2025.
That should support a dividend increase in the low to mid single digits every year. But even a modest 3% to 5% increase on a 7.7% yield is nothing to sneeze at.
The stock is a bargain
Not only is the dividend attractive with a strong likelihood of continued steady increases, but Enbridge's stock is also a great bargain.
It currently has an enterprise value (EV) of just 11 times the midpoint of management's 2024 EBITDA guidance. And remember: There's some small upside there from the Dominion utility acquisitions.
The stock historically trades for an EV/EBITDA multiple of around 14, suggesting there's a lot of upside to the stock price.
Even if investors don't see significant capital appreciation, they can sit back and collect their massive payout year after year. So for income investors, Enbridge makes a good addition to a dividend stock portfolio.
