Enbridge Inc.’s (TSX:ENB) stock price slide has made its dividend yield (currently at 6.7%) amongst the highest in its peer group
SmallCapPower | April 10, 2018: Enbridge Inc. (TSX:ENB) (NYSE:ENB) is one of North America’s largest energy infrastructure providers, transporting 28% of the crude oil produced in North America and 23% of all natural gas consumed in the United States. Enbridge is Canada’s largest natural gas distributor, with ~3.7 million retail customers in Ontario, Quebec, New Brunswick and New York State.
Enbridge shares have slid more than 25% over the past year and currently trade near its 52-week low on the TSX. The decline can be partly attributed to the US$28 billion Spectra Energy acquisition in late 2017, as well as dilution related to raising capital for expansion projects. The sharp fall in its stock price makes the dividend yield (currently at 6.7%) amongst the highest in its peer group, becoming an attractive stock for passive, dividend-focused investors. Additionally, the dividend payout is expected to increase 10% through 2020, aided by $22 billion in expansion projects under way.
Investment Thesis
- Diversified energy infrastructure assets across North America
- Low-risk business model and high dividend yield
North America’s leading energy infrastructure provider
Enbridge is one of the largest global energy infrastructure players, operating the world’s longest crude oil and liquids transportation system with ~17,000 miles (~27,400 km) of active pipe, delivering an average of 2.8 million barrels of crude oil each day. Enbridge boasts of 11.4 billion cubic feet per day (Bcf/d) of processing capacity, 307 thousand barrels per day (Mbpd) of NGL production, and 437 billion cubic feet (Bcf) of net natural gas storage capacity.
Enbridge’s liquid pipelines
Enbridge’s gas transmission infrastructure
Low-risk business model
As a pipeline operator, Enbridge’s business model has lower risk compared to oil and gas producers that are exposed to commodity-price risk. The Company generates stable fee-based revenues from long-term commercial agreements with strong counterparties, has no direct commodity exposure and minimal volume risk. This business model provides predictable cash flows. For example, ~96% of cash flows are underpinned by long-term cost of service or equivalent and take-of-pay agreements.
Strong growth outlook
Notwithstanding the US$28 billion Spectra Energy acquisition in late 2017 and the associated dilution that strained the Company’s per share metrics (EPS fell 15% and ACFFO per share fell 10%) in 2017, Enbridge looks set for acceleration in revenues and cash flows as it continues its expansion efforts.
Projects brought into service in 2017
Enbridge brought $12.0 billion worth of projects in 2017 and has $22 billion of expansion projects through 2020. These expansion projects will likely help the Company to meet its $12.5 billion 2018 EBITDA guidance and deliver a 10% growth in available cash flow from operations (ACFFO) through 2020.
Expansion projects – 2018-2020
High dividend yield that could further increase through 2020
A low-risk, predictable business model combined with stable cash flows have enabled Enbridge to declare consistent dividends over the past several years. In November 2017, the Company announced a quarterly dividend of $0.671 per common share, or $2.684 annualized, which translates into an annualized dividend yield of 6.7% at current prices. In addition to the high dividend yield, Enbridge expects its dividend per share to increase 10% annually through to 2020, aided by $22 billion in expansion projects under way.
Disclosure: Neither the author nor his family own shares in the company mentioned above.
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