Enbridge Inc: This 8% Yielder Could Pay Investors Even More
A High-Yield Stock with Reliable Payouts
In today’s stock market, earning an eight-percent annual dividend yield should already be satisfying for most income investors. But for investors of Enbridge Inc (NYSE:ENB) stock, even bigger payouts are likely on the way.
Allow me to explain.
Headquartered in Calgary, AB, Canada, Enbridge is an energy infrastructure company with four main operating segments: Liquids Pipelines, Gas Transmission, Gas Distribution & Storage, and Renewable Power Generation.
While Enbridge is a Canadian-based company, it has a strong presence in the U.S. In particular, Enbridge’s Gas Transmission segment is responsible for transporting approximately 20% of the natural gas consumed in the U.S., while its Liquids Pipelines segment transports about 25% of all crude oil produced in North America. (Source: “Investment Community Presentation September 2020,” Enbridge Inc, last accessed November 16, 2020.)
Up north, the company’s Gas Distribution & Storage segment serves about 3.8 million retail customers in the Canadian provinces of Ontario and Quebec. Meanwhile, Enbridge’s Renewable Power Generation segment generates approximately 1.8 gigawatts of net renewable power in North America and Europe.
If you’ve been following the markets, you’d know that, for most of this year, the energy industry was not exactly an investor favorite. Many energy companies have struggled because of the impact from the COVID-19 pandemic and volatile commodity prices.
Unsurprisingly, ENB is not a hot ticker at the moment, but the company actually has a rather resilient business model. Enbridge has more than 40 diverse sources of cash flows, of which less than two percent is at risk of loss due to market-price movements. Moreover, 95% of the company’s customer base is investment-grade. (Source: “Q3 Financial Results & Business Update,” Enbridge Inc, November 6, 2020.)
To see just why Enbridge stock could be one of the lower-risk plays in the energy sector, all you need to do is take a look at its distribution history.
Since 1995, the company has paid increasing dividends every year. During this period, the per-share payout from ENB stock increased at a compound annual growth rate (CAGR) of about 11%. (Source: “Dividends and Common Shares,” Enbridge Inc, last accessed November 16, 2020.)
Considering the ups and downs that the energy industry has gone through in the past 25 years, Enbridge’s dividend growth track record is very impressive.
Usually in times like this, reliable dividend-growth stocks are highly sought after—meaning they don’t yield much. But because ENB stock has not been a hot commodity for most of this year, it actually offers overized payouts. With a quarterly dividend rate of CAD$0.81 per share, Enbridge stock provides a very generous annual dividend yield of eight percent.
Why Enbridge Inc Could Be an Opportunity
Of course, you can find stocks with even higher yields. What makes ENB stand out—other than its impressive track record—is the company’s ability to cover its payout in this extraordinary environment.
Enbridge reported its earnings in early November. The report showed that, in the third quarter of 2020, the company generated CAD$1.03 in distributable cash flow per share (DCF), which was down by just one cent from its DCF in the year-ago period. Considering that the company paid a cash dividend of CAD$0.81 per share for the quarter, it had a payout ratio of 78.6%, leaving a margin of safety. (Source: “Enbridge Reports Strong Third Quarter and Reaffirms 2020 Financial Guidance,” Enbridge Inc, November 6, 2020.)
Also in the company’s earnings report, management reaffirmed their 2020 financial guidance. They expect full-year DCF per share to come in near the midpoint of the guidance range of CAD$4.50–$4.80 per share .
Note that, because ENB stock is on track to pay total dividends of CAD$3.24 per share in 2020, reaching the midpoint of the guidance range (meaning the company will earn a DCF of CAD$4.65 per share for the year), that would allow it to achieve a comfortable payout ratio of 69.7%.
The best part is, even though the energy industry undoubtedly faces uncertainty going forward, Enbridge Inc is committed to raising its payout without pauses. In the company’s latest earnings conference call, the executive vice president and chief financial officer, Colin Gruending, said, “…we intend to annually increase the dividend including for 2021.” (Source: “Enbridge Inc. (ENB) CEO Al Monaco on Q3 2020 Results – Earnings Call Transcript,” Seeking Alpha, November 6, 2020.)
Bottom line: If an investor purchases Enbridge stock today, there’s a good chance they will earn higher yield on cost in the years ahead.