The big attraction for investors today with Enbridge (ENB +0.19%) is the stock's hefty 6.6% dividend yield. The dividend backing that yield, meanwhile, has been increased annually (in Canadian dollars) for 29 consecutive years. And yet the backstory for Enbridge today is one of change, but in a good way -- if you like owning high-yield stocks of boring and reliable businesses. Here's what you need to know.
What does Enbridge do?
Enbridge falls into the energy sector. Specifically, it is classified as a midstream company. That makes complete sense, given that its earnings before interest, taxes, depreciation, and amortization (EBITDA) are largely derived from pipelines that move oil and natural gas. However, Enbridge is a bit different from most of its midstream peers because its portfolio includes other assets as well.
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Enbridge has been focused on transitioning its portfolio along with the changes taking shape in the broader energy sector. The biggest change in the sector has been the shift away from dirtier energy sources toward ones that are cleaner. The clear loser has been coal, with natural gas replacing it as a primary energy source because it is cleaner-burning. However, oil is also facing headwinds, too, with electricity being an increasingly important factor in transportation.
Enbridge's approach to these changes has been to build out a natural gas utility business and to build up a renewable power operation. This is where the story gets interesting for investors over the next year.
Change is in the air at Enbridge
Clean energy is a small portion of Enbridge's portfolio, at roughly 3% of EBITDA. It will continue to grow as the company invests in the space, but there's not going to be a huge change here over the next 12 months. You should watch Enbridge's clean energy plans, but the real story is in the utility business.
In late 2023 Enbridge agreed to buy three regulated natural gas utilities from Dominion Energy. These assets are a perfect fit for Enbridge, which likes boring businesses that throw off a steady stream of cash and offer consistent investment opportunities. That is exactly what regulated utilities are known for. The addition of the three U.S.-based assets will increase the contribution from natural gas utilities from 12% of EBITDA to 20%. That, in turn, will reduce the contribution from oil pipelines from 57% to 50% and take natural gas pipelines from 28% to 25%.
NYSE: ENB
Key Data Points
Essentially, over the next year Enbridge will become an even more boring and reliable company even as it continues to shift away from the dirtiest energy source it is exposed to. After all three of the deals are complete, oil will be down to just 50% or so of EBITDA.
That said, acquiring regulated utility assets is not an easy process. It requires jumping through a number of hoops, including getting the local regulators to sign on to the deal. Enbridge has already closed two of the transactions, but a third is still working through the process. And, even after the final acquisition is closed, there remains the task of integrating the acquired businesses into the company's portfolio. Importantly, this includes a cultural component, something that will likely take at least a year to work through.
Enbridge is in a transition period
All in all, Enbridge is a high-yield energy stock with a highly consistent business that pays a generous dividend. That won't change over the next year. But the business is going to shift a little bit as the new regulated natural gas utility assets are integrated into Enbridge's portfolio. The likely outcome is an even more boring and reliable Enbridge in 12 month's time, but there's still some work to do before the company gets there. Still, if you like boring and reliable dividend stocks, Enbridge could be a good fit for your portfolio today.
