The large reason most income investors will wish to buy Enbridge (NYSE: ENB) is its hefty dividend, which currently yields 6.9%. Nevertheless, you really want to dig beneath that number to know why this stock is so desirable to own. The list of pros includes the dividend (but for greater than just the yield), the diversified underlying business, and the expansion the corporate has undertaken.
1. It boasts a lovely dividend yield
Enbridge’s dividend yield of 6.9% compares quite favorably to the broader market, which on average is yielding a scant 1.2% or so, and in addition to the energy sector, where the common yield is roughly 3.1%. So, clearly, income investors will find Enbridge’s yield attractive on each an absolute level and relative to other options. But there’s yet another factor to contemplate here: The yield can be near the high end of its historical range. In other words, Enbridge’s dividend looks attractive relative to its own history as well.
Then there’s the undeniable fact that Enbridge has increased its payout annually for 29 consecutive years. Further, its distributable money flow payout ratio is well inside management’s goal range of 60% to 70% The balance sheet can be healthy: Leverage is well inside management’s goal range of 4.5 to five times debt to EBITDA (earnings before interest, taxes, deprecation, and amortization). Simply put, the dividend is on a robust financial foundation.
2. Enbridge is a toll taker
What’s equally interesting here is Enbridge’s core business model. Throughout its business, the corporate focuses on generating reliable money flows from fees, regulated assets, and contracts. This list is very important to look at, nevertheless, since it speaks to the very different segments contained inside the portfolio.
The core assets of the business, accounting for around 75% of EBITDA, are oil and natural gas pipelines. These are toll-taker assets — customers pay for the usage of the vital energy infrastructure that Enbridge owns. One other 22% or so of EBITDA is derived from its natural gas utilities, that are regulated assets producing reliable money flows. The remaining EBITDA comes from its renewable power assets, where revenues are driven by long-term contracts.
There are a few key takeaways here. First, every business that Enbridge owns is a toll taker that produces reliable money flows to support the dividend. Second, Enbridge is pretty diversified in comparison with other midstream players.
3. Enbridge is shifting with the times
The diversification within the business is purposeful, however it’s not simply to create various income streams. You see, Enbridge’s management is well aware that the world is shifting away from dirtier energy sources and toward cleaner ones. That’s the reason it recently agreed to purchase three natural gas utilities from Dominion Energy (NYSE: D). This move will reduce Enbridge’s exposure to grease from 57% of EBITDA to 50%.
While natural gas remains to be a hydrocarbon fuel, it’s cleaner burning than oil and coal. Natural gas is anticipated to be a transition fuel that will likely be relied on because the world moves toward much greater use of renewable power, which remains to be a small piece of the general energy pie. But Enbridge is not ignoring clean energy; it has a small footprint in that space as well, providing around 3% of its EBITDA. The goal is not to remake the corporate, it’s to offer the world with the facility it requires. Management is doing just that because it slowly shifts toward cleaner options.
Attractive throughout
In case you are searching for a high-yield energy stock that you would be able to count on for the long run, Enbridge is one which you must probably be trying to buy today. And for those who do resolve to purchase it due to its high yield, attractive business, and purposefully shifting asset portfolio, it is advisable to buy a whole lot of it. The stock remains to be attractively priced today, but which may not be the case tomorrow as increasingly more investors work out just how attractive a dividend stock it has grow to be.
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Reuben Gregg Brewer has positions in Dominion Energy and Enbridge. The Motley Idiot has positions in and recommends Enbridge. The Motley Idiot recommends Dominion Energy. The Motley Idiot has a disclosure policy.
3 Reasons to Buy Enbridge Stock Like There’s No Tomorrow was originally published by The Motley Idiot