According to new research from The Motley Fool, Enbridge (ENB 0.41%), one of the biggest pipeline operators in the world, is now also one of the largest publicly traded energy companies. Its market cap recently surpassed $100 billion. For years, investors have relied on the company for its juicy dividend, which now delivers a yield of nearly 6%.
Enbridge has been a terrific long-term investment throughout its history. But is it still a buy today? You might be surprised by the answer.
Enbridge has amazing competitive advantages
When it comes to buying shares of businesses with durable competitive advantages, it's hard to beat Enbridge. The company has the longest pipeline network in North America.
Every day, it transports about 90% of Canada's crude oil exports to the U.S., as well as roughly 40% of all crude oil produced in North America. It's an industry behemoth, and if you understand pipeline economics, you know that owning this network is one of the best infrastructure plays possible.
NYSE: ENB
Key Data Points
When it comes to transporting hydrocarbons over land, pipelines are just about the most cost-effective and efficient methods of getting output from one place to another, whether that's shipping crude oil from an operating field to a refinery, or getting the refined product back to end users or export facilities.
It takes billions of dollars and years of permitting to get a pipeline built. And because most of the costs are up-front, pipeline builders typically enjoy high levels of cash flow once a project is in operation.
The end result is an asset that the entire hydrocarbon supply chains needs to function -- an asset that can't easily or cheaply be replicated by the competition. Due to increasing regulations, it's possible that some of Enbridge's pipelines never see meaningful competition ever again.
From a competitive standpoint, Enbridge has few peers. But in the coming decades, there are many headwinds related to hydrocarbon demand -- everything from climate change risks to pollution concerns.
Static demand for hydrocarbons or even declines would be a direct blow to Enbridge, which typically charges by volume for transport, like a toll road. These are legitimate issues, which is why only two types of investors should consider the stock for their portfolio today.
Source: Getty Images
Buy Enbridge for these 2 reasons
Even if hydrocarbon demand fails to grow in the decades to come, there are still two good reasons to buy Enbridge stock today.
The first is the hefty 5.8% dividend yield. The company has been raising its dividend consistently for decades with very few interruptions. That's due to its toll-like business model that generates huge cash flows, even in volatile environments.
Because most of its revenue is based on volume, not commodity prices, Enbridge can maintain profitability even in a bear market. For investors looking for reliable dividends without sacrificing the potential for growth, it remains a great choice.
This brings us to the second reason to buy Enbridge stock: bear market stability. To be clear, the company's highly levered balance sheet and partial exposure to commodity prices won't completely insulate your portfolio. But for the same reason its toll-like business model can generate stable dividends even in times of trouble, the stock often gyrates less than the average company during a bear market. Its beta, for instance, is around 0.87, demonstrating relative stability.
I'm a big fan of Enbridge's business model. But the demand picture for hydrocarbons 20 to 30 years from now muddies the picture for younger investors.
However, for retirees looking for extra income and investors looking to preserve capital without sacrificing potential income or upside potential, Enbridge remains a great fit even with a market cap above $100 billion.
