Enbridge (ENB -1.21%) has enriched investors over the years. The Canadian energy infrastructure behemoth pays a massive and steadily growing dividend (currently yielding 7.7%). The high-yielding payout, combined with its growing earnings, has given it the fuel for an 11.2% compound annual growth rate in its total shareholder return over the last 20 years. That's outperformed the S&P 500's total return of 9.7%, as well as Enbridge's peers in the utilities (8%) and midstream (7.7%) sectors.
The pipeline and utility giant should be able to continue producing double-digit annualized total returns over the next several years. Here's a look at two factors supporting that view.
A rock-solid foundational return
One of the great things about dividend stocks like Enbridge is that they supply investors with a tangible base return in the form of dividend income. At its current dividend payment level, Enbridge can generate an annual income return of roughly 7.7% for investors who buy around the current price.
Unlike those of some high-yield dividend stocks, that's a very bankable return. The company generates durable and stable cash flows. It has a diversified portfolio; its low-risk utility assets include gas transmission and storage and renewable power, and its midstream businesses include liquids pipelines and gas transmission. Enbridge gets 98% of its earnings from low-risk commercial frameworks like cost-of-service agreements and long-term, fixed-rate contracts with high-quality customers (95% have investment-grade credit ratings).
The durability and predictability of its earnings have been on full display over the years. Enbridge has achieved its financial guidance in each of the last 17 years despite several significant market dislocations.
Meanwhile, the company has a reasonable dividend payout ratio -- 60% to 70% of its distributable cash flow. That gives it a comfortable cushion, while allowing it to retain significant excess free cash to fund new investments and maintain its financial strength. The company also has a solid leverage ratio that's currently below its target range of 4.5 to 5.0 (a very comfortable level for its utility-like cash flows). That conservative leverage ratio further enhances its financial flexibility.
Increasingly visible growth
Enbridge's low-risk business model and conservative financial profile give it tremendous financial capacity. The company estimates that it has 8 billion to 9 billion Canadian dollars ($5.9 billion to $6.7 billion) of total annual investment capacity, between its excess free cash flow after paying dividends and balance-sheet flexibility within its current leverage target. That gives it the funds to invest in organic expansion projects, make accretive acquisitions, and opportunistically repurchase shares.
All of that supports the company's base growth plan. It currently has a massive CA$25 billion ($18.5 billion) of commercially secured capital projects in its backlog. It expects to invest CA$6 billion to CA$7 billion ($4.4 billion to $5.2 billion) annually to build these projects, which should enter commercial service through 2028.
Enbridge's backlog gives it lots of visibility into its earnings growth rate over the next few years. Those projects will grow its earnings by around 3% annually. Cost savings and optimizations will add another 1% to 2% to its bottom line each year. Enbridge will also get a bump from mergers and acquisitions, with its deal to buy three gas utilities from Dominion Energy, providing a meaningful near-term boost.
Add it all up, and these catalysts should grow adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 7% to 9% annually through at least 2026. Distributable cash flow should rise by around 3% per share each year, weighed down by some modest tax legislation headwinds and new shares issued to fund the Dominion deals. That growing cash flow will enable Enbridge to continue increasing its dividend.
There's more growth beyond 2026. Enbridge has already secured several expansion projects that should enter service in 2027 and 2028, and it has several more under development. It also has the growing capacity to deploy additional capital into accretive acquisitions. Put it all together, and Enbridge believes it can grow its adjusted EBITDA and distributable cash flow per share by around 5% annually over the medium term. That should fuel dividend growth of as much as 5% per year.
The fuel to produce attractive total returns
With a dividend yield currently at 7.7%, Enbridge provides investors with a rock-solid base return. On top of that, the company expects to grow its cash flow per share by around 3% annually through 2026 (with acceleration expected beyond that year).
So the company should be able to produce an average annualized total return of more than 10% -- an excellent return potential for such a low-risk stock. It makes Enbridge a great long-term investment opportunity.
