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Enbridge Stock: More Upside Potential Ahead
Stock Analysis & Ideas

Enbridge Stock: More Upside Potential Ahead

Enbridge Inc. (ENB) is a leader in the North American energy infrastructure industry. The company’s primary business includes running liquid pipelines, which transport around 30% of the crude oil produced in North America. Additionally, Enbridge’s gas transmission and midstream segment carry about 20% of the natural gas consumed in the U.S. every year.

Enbridge is, furthermore, a major participant in the gas distribution and storage space. It serves about 75% of Ontario residents through approximately 3.8 million meter connections.

Finally, the company’s renewable power generation division has a capacity of 1,766 megawatts (MW) of net renewable power in North America and Europe. The Canada-based company trades both on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE).

In my opinion, despite Enbridge’s recent rally following the ongoing optimism in the energy sector, the stock remains quite reasonably valued. Enbridge also offers a tremendous yield of 6.55%. The most recent dividend hike and management’s confident guidance should reassure investors of its coverage. Hence, I view Enbridge as a wonderful pick for-income oriented investors and remain bullish on the stock.

Recent Results

Enbridge’s Q4-2021 results came in quite strong once again, with adjusted EBITDA growing by 12.5% year-over-year, to almost CAD$3.7 billion. Adjusted EBITDA growth was mainly powered by the U.S. portion of the Line 3 Replacement Project contributing to results and the purchase of the Enbridge Ingleside Energy Center.

Distributable cash flows came in at CAD$2.5 billion (US$1.96 billion), or

US$0.97 on a per-share basis, growing by 12.8% vs. the comparable period last year in constant currency.

Management projects distributable cash flows to land between CAD$5.20-5.50 in Fiscal Year 2022. This translates to almost USD$4.20 at the midpoint of management’s guidance at the current FX rates, suggesting growth of around 7.8% compared to Fiscal 2021. It also means that the company should celebrate a new DCF/share record and considerably higher dividend coverage ahead.

The Dividend

Enbridge exhibits a best-in-class dividend growth record. The company has hiked its annual dividend for the past 27 years, with no exception. This includes even the most trying times for the energy sector, like during 2007-2008, or a more recent example, during the COVID-19 pandemic. The company would tick all the needed requirements to join the Dividend Aristocrats Index. As a Canadian company, however, this is not possible.

Enbridge’s dividend has grown at an average CAGR of 10% since 1995. Last December’s 3% hike was rather prudent, as the company remains cautious coming out of the pandemic. Still, we like conservative management with financial discipline.

Based on ENB’s Fiscal Year 2022 guidance, dividend growth is likely to reaccelerate in the medium term. According to the company’s projected DCF estimate for this year, the payout ratio seems quite relaxed, resting at around 64.2%.

Therefore, investors should feel rather confident since Enbridge’s current yield of 6.55% is well-covered, and there should be enough room for growth in Enbridge’s upcoming dividends as well.

Wall Street’s Take

Turning to Wall Street, Enbridge has a Moderate Buy consensus rating, based on eight Buys and seven Holds assigned in the past three months. At $45.18, the average Enbridge price target implies 9.9% upside potential.

Conclusion

Enbridge is one of the highest-quality companies in the energy sector, in my view. The outlook for 2022 appears to be quite strong, the stock’s yield remains quite substantial, and the valuation is particularly attractive.

Assuming DCF/share of around C$5.35 or $4.20 for this year, the stock is trading at a P/DCF of around 9.8. Accordingly, I remain bullish on the stock.

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