Enbridge’s new projects, combined with improving oil and gas prices, should help boost its share price. The stock remains down from $55 in February 2020. That was before the pandemic and the drop in oil prices.
Moreover, 98% of the company’s revenue comes from regulated projects or take-or-pay contracts. That helps shield Enbridge from volatile oil prices and has let it raise your annual dividend rate each year for the past 26 years.
The recent cancellation of TC Energy’s Keystone XL pipeline also strengthens the power of the company’s new Line 3 pipeline to fuel future dividend hikes.
ENBRIDGE INC. $45 is a buy. The company (Toronto symbol ENB; Income-Growth Dividend Payer Portfolio, Utilities sector; Shares o/s: 2.0 billion; Market cap: $90.0 billion; Dividend yield: 7.4%; Dividend Sustainability Rating: Highest; www.enbridge.com) operates pipelines pumping oil and natural gas from western to eastern Canada and the U.S. It also distributes gas to 3.8 million consumers in Ontario and Quebec.
With the March 2021 payment, Enbridge increased its quarterly dividend by 3.1%, to $0.835 a share from $0.81. The company’s new annual rate of $3.34 yields a high 7.4%.
Enbridge has now raised its annual dividend rate each year for the past 26 years. It continues to make its dividend a major priority, targeting a payout ratio of between 60% and 70% of its annual cash flow. In 2020, dividends equalled 71.7% of cash flow.
Enbridge reported revenue of $34.6 billion in 2016. In February 2017, it acquired U.S. pipeline operator Spectra Energy for $37 billion in stock. Thanks to that purchase, revenue jumped 28.3% to $44.4 billion. Revenue rose again, to $46.4 billion, in 2018 and to $50.1 billion in 2019.
The COVID-19 pandemic has hurt oil demand and prices. As a result, Enbridge’s revenue fell 21.9% to $39.1 billion in 2020.
The Spectra purchase significantly increased Enbridge’s total cash flow, from $3.7 billion in 2016 to $9.4 billion in 2020. That’s a 154.1% increase. Due to shares issued to Spectra shareholders, cash flow per share rose at a more moderate rate of 14.5%, from $4.08 to $4.67.
In 2020, Enbridge placed $1.6 billion worth of new projects into service. Between 2021 and 2023, it plans to spend $16 billion on new growth projects.
The biggest of those is the replacement of the U.S. portion of Enbridge’s Line 3 pipeline, which pumps crude oil from Alberta to Wisconsin. The company completed the Canadian portion of this project in December 2019. Enbridge will spend $4.0 billion U.S. on this project, which should begin operating in the fourth quarter of 2021.
The company also plans to gradually shrink its exposure to oil pipelines, which supply 54% of earnings. Enbridge gets a further 43% of its earnings from gas pipelines and storage. The remaining 3% of the company’s earnings come from renewable energy projects.
Enbridge feels its experience operating offshore wind farms in the U.K. and Germany will let it benefit from the growing push by U.S. states to support renewable energy projects.
Meanwhile, the company benefits from the 98% of its shipping contracts backed by take-or-pay agreements. That obliges customers to pay regardless of whether they use their contracted pipeline space or not.
As a result of those predictable revenue streams, Enbridge expects its cash flow for all of 2021 to range between $4.70 and $5.00 a share. The stock trades at just 9.3 times the midpoint of that range. It expects to expand its cash flow by 5% to 7% annually over the next three years. That will let it keep raising your dividend.
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