Enbridge Inc: The Best 7%+ Yielding Energy Stock on the Market?
A High-Yield Energy Stock to Think About
In this day and age, not every income investor feels comfortable putting their money in the energy sector. After all, the price of energy commodities often goes on a roller-coaster ride. And since income investors tend to be risk-averse, that kind of volatility isn’t exactly appealing.
Still, there are energy stocks worth considering, even for the risk-averse income investor.
For instance, in November 2020, I told readers to consider Enbridge Inc (NYSE:ENB). I wrote, “If an investor purchases Enbridge stock today, there’s a good chance they will earn higher yield on cost in the years ahead.”
As it turns out, investors didn’t have to wait very long to earn a higher yield on cost.
On December 8, Enbridge declared a quarterly cash dividend of CA$0.835 per share, representing a 3.1% increase from its prior quarterly payout of CA$0.81 per share. The new dividend rate went into effect on March 1, 2021. (Source: “Enbridge Announces 2021 Financial Guidance, Increases Dividend, and Provides Update on Strategic Priorities,” Enbridge Inc, December 8, 2020.)
Better yet, ENB stock also gained some upward momentum. When I told readers to consider the company, it was trading at $29.08 per share. As of this writing, Enbridge stock is at $36.70. That’s a gain of more than 26%! And investors have been collecting bigger dividend checks than before, too.
Of course, that means for investors who didn’t get on board earlier, the stock is more expensive than before. However, if you look at what the company has been doing, you’ll see that ENB stock remains one of the best high-yield energy stocks on the market.
As an energy infrastructure company, Enbridge Inc operates through four main segments: Liquids Pipelines, Gas Transmission, Gas Distribution & Storage, and Renewable Power Generation.
Enbridge is headquartered in Calgary, AB, Canada, so it may not get as much attention from the financial media as the U.S.-based energy stocks. Nonetheless, it’s a huge player in North America’s energy sector. To give you an idea, the company’s Gas Transmission business is responsible for transporting 20% of the natural gas consumed in the U.S.; its Liquids Pipelines business transports about one quarter of North America’s crude oil; and its gas utility franchise has 3.8 million meter connections in Ontario—Canada’s most populous province. (Source: “Investment Community Update: March 2021,” Enbridge Inc, last accessed April 9, 2021.)
Enbridge boasts a very resilient business model, as it has more than 40 diversified sources of cash flow. Meanwhile, 95% of the company’s customers are investment-grade-rated or equivalent. Because of its diversified pipeline-utility business model, Enbridge can deliver predictable results in all market cycles.
Just take a look at last year, when things were extraordinary, to say the least.
In 2020, Enbridge generated CA$9.4 in distributable cash flow, which actually represented an increase from the CA$9.2 billion it earned in 2019. Given the adverse operating environment the energy sector faced for a substantial period of the year, that improvement is quite impressive. (Source: “Enbridge Reports Strong 2020 Financial Results,” Enbridge Inc, February 12, 2021.)
Enbridge’s 2020 distributable cash flow translated to CA$4.67 per share. Considering that the company paid total dividends of CA$3.24 per share for the year, it had a distributable cash flow payout ratio of 69.4%, which left a margin of safety.
And that’s not all.
Even with the uncertainty ahead, management expects that Enbridge will deliver annual distributable cash flow per share growth of five to seven percent through 2023. This projection is based on one to two percent annual growth from toll escalators, productivity improvements, and capacity optimizations, as well as four to five percent annual growth from the execution of the company’s $17.0-billion secured capital program.
Last but certainly not least, Enbridge happens to be one of the top dividend growth stocks in the energy sector. From 1995 to 2021, the company’s annual dividend has increased at a compound annual growth rate (CAGR) of about 10%. This is truly remarkable, considering all the ups and downs the energy sector has gone through over these years. (Source: “Dividends and Common Shares,” Enbridge Inc, last accessed April 9, 2021.)
Regarding future allocation of capital, Enbridge’s chief financial officer, Colin Gruending, said, “Protecting the balance sheet remains our top priority. This is not going to change. Similarly, ratable dividend growth is central to our value proposition, and that’s not going to change either.” (Source: “Edited Transcript: Q4 2020 Enbridge Inc Earnings Call,” Enbridge Inc, February 12, 2021.)
Bottom Line on Enbridge Inc
At its current share price, Enbridge stock offers an annual dividend yield of 7.2%, which is certainly attractive in this low-yield environment.
Factoring in Enbridge Inc’s resilient business model, impressive dividend increase history, relatively conservative payout ratio, and projected growth, I’d say more returns should be on the horizon for ENB stock investors.