Enbridge Inc: This 5.9% Yielder Could Pay Investors a Lot More
A Top Dividend Stock for Income Investors
In an era when the average S&P 500 company pays less than two percent in dividends, income investors would feel pretty happy to earn a reliable yield of 5.9%. What’s even better is that the company behind this 5.9% yield is well positioned to pay out even more.
I’m talking about Enbridge Inc (NYSE:ENB), an energy infrastructure company headquartered in Calgary, Alberta.
While Enbridge is a Canadian company, it has a substantial presence in the United States. For instance, the company’s “Gas Transmission and Midstream” segment is responsible for transporting approximately 20% of the natural gas consumed in the United States. Meanwhile, its “Liquids Pipelines” business transports around 25% of the crude oil produced in North America.
Enbridge’s “Utilities and Power Operations” segment serves approximately 3.7 million retail customers in the Canadian provinces Ontario and Quebec and generates around 1,750 megawatts of net renewable power in North America and Europe. (Source: “Enbridge Inc. Reports Strong Third Quarter 2019 Results,” Enbridge Inc, November 8, 2019.)
The best part is, this Canadian company also trades on the New York Stock Exchange, so it’s very convenient for American investors to own its shares.
Enbridge is a generous dividend payer. Enbridge stock has a quarterly dividend rate of CA$0.74 per share, which at its current share price translates to an annual yield of 5.9%.
As I mentioned earlier, ENB stock’s payout is quite reliable.
In the third quarter of 2019, Enbridge generated CA$2.1 billion of distributable cash flow, representing a substantial increase from the CA$1.6 million earned in the year-ago period. On a per-share basis, the company’s distributable cash flow was CA$1.04 for the quarter, which easily covered its quarterly dividend payment of CA$0.74 per share.
Previously, management projected that Enbridge would generate CA$4.30 to CA$4.60 per share in distributable cash flow in full-year 2019.
Note that Enbridge is on track to pay four quarterly dividends totaling almost CA$3.00 per share in 2019. Therefore, if the company reaches the midpoint of the guidance range, it would achieve a payout ratio of 66.3%.
In the company’s latest earnings release, Enbridge’s President and Chief Executive Officer Al Monaco said that they now expect the company’s distributable cash flow to exceed the midpoint of its guidance range. Therefore, the payout ratio could turn out to be even lower.
More Dividend Hikes Ahead From Enbridge Inc?
Of course, a conservative payout ratio doesn’t always imply that there will be further dividend hikes. In fact, there are companies that generate huge amounts of cash from their operations but don’t pay a dividend at all. Some companies choose to buy back their own shares as a way of returning cash to investors, while others simply reinvest those funds.
But Enbridge has always used dividends as a main channel of delivering shareholder returns. It has been making uninterrupted dividend payments for over 64 years and has raised its payout in each of the last 24 years. (Source: “Dividends and Common Shares,” Enbridge Inc, last accessed November 20, 2019.)
This kind of track record should be reassuring. The energy industry has had quite a few ups and downs in the past 24 years, but Enbridge stock investors got a bigger payout every single year—a true indication of a sign of strength from the company.
Also, if a company has been raising its payout every year and that streak suddenly stops, management will likely have some serious explaining to do. So naturally, Enbridge would want to continue growing its dividends.
As a matter of fact, management has already hinted at what they are going to do with the company’s dividend policy in the future. In an investor presentation in October, Enbridge said that it would be pursuing a 10% growth rate in dividend per share through 2020. (Source: “Investment Community Presentation October 2019,” Enbridge Inc, last accessed November 20, 2019.)
Better yet, in the same presentation, the company said that its post-2020 growth rate in distributable cash flow per share will be five to seven percent. When a company has a strong track record of dividend growth, a low payout ratio, and a growing business, more dividend hikes should be on the way.
Finally, even though Enbridge comes from the energy industry—which is known for being volatile, the company actually has a relatively low-risk business model.
Management projects that 98% of Enbridge’s expected earnings before interest, tax, depreciation, and amortization (EBITDA) in 2019 will come from regulated utility business, take-or-pay contracts, and fixed fees. As a result, ENB stock investors don’t have to worry too much about commodity price volatility.
At this point, it’s safe to say that, if an investor owns Enbridge stock, in a few years’ time, they would be earning a much higher yield on cost than the current 5.9%. And that should be a good enough reason to put Enbridge Inc in an income investors’ watch list.