The frenzy that took place in the energy sector during the first half of the year seems to have somewhat softened. However, commodity prices remain high enough for energy companies to keep making a killing moving forward, while energy infrastructure globally appears to have become more critical than ever. Thus, it may make a lot of sense to identify companies in the space that remain undervalued while providing investors with hefty dividend yields as they wait for the price to return to fair value.
Enbridge primarily operates liquid pipelines and is also engaged in renewable power generation, gas distribution, storage, and energy marketing services. Meanwhile, Enterprise Products Partners largely provides midstream energy services to producers and consumers of natural gas and natural gas liquids, petrochemicals, refined products, and crude oil.
Due to the critical nature of their assets, both companies have managed to produce resilient cash flows even during the harshest economic environments. They should produce robust results this year and keep growing their dividends while offering compelling upside.
Accordingly, I am bullish on both stocks.
ENB and EPD Stocks Have Robust Dividend–Growth Track Records
Stocks in the oil & gas midstream industry often come with hefty dividend yields. However, there are myriad examples out there in which these high yields are slashed during economic downturns or during periods when demand for oil and gas is disrupted. Only a handful of high-quality companies in the space have managed to keep hiking their payouts during such periods, and ENB and EPD are certainly amongst them.
Since the two companies have grown their dividends for 27 and 24 years, respectively, ENB and EPD have proven that their businesses are largely resilient to the underlying periodic hurdles found in the energy sector. This includes periods like the Great Financial Crisis of 2007-2008 or, a more recent example, the COVID-19 pandemic.
ENB’s dividend-growth track record is particularly impressive when taking into account its underlying dividend growth pace. Since 1995, ENB’s dividend-per-share has grown at a CAGR of 10%. EPD’s dividend growth has slowed down lately, with the 10-year dividend-growth CAGR standing at around 4%. Still, considering how volatile the industry has been over the past decade, this is a noteworthy and welcome pace of dividend growth.
I believe EPD has taken a more prudent dividend-growth approach (note that technically EPD pays out distributions and not dividends) to ensure it can maintain its track record even if the industry was to take a massive beating.
Last year, the company reported a distributable cash flow per unit (DCF/unit) of $3.00. Based on its performance over the first half of the year, I would expect this figure to land anywhere between $3.30 and $3.50 in Fiscal Year 2022. Assuming the lower end of this range and the current distribution run rate, EPD’s payout ratio stands at a comfortable 57.6%.
In the case of ENB, the company has aided us by providing straightforward guidance for the year, expecting DCF/share to land between C$5.20 and C$5.50. The midpoint of management’s guidance also implies a very comfortable payout ratio, which hovers just under 65% based on ENB’s current dividend run rate.
These payout ratios leave plenty of room for both companies to keep growing their capital returns even if the bottom line were to be suppressed for a year or two. Combined with the overall qualities attached to their critical infrastructure assets and the fact that ENB and EPD are currently yielding 6.8% and 7.9%, respectively, I believe both names offer some of the strongest investment cases in the industry for dividend-growth investors.
Is ENB Stock a Buy or Sell?
Turning to Wall Street, Enbridge has a Moderate Buy consensus rating based on six Buys and three Holds assigned in the past three months. At $43.96, the average Enbridge stock forecast implies 13.7% upside potential.
Is EPD a Good Stock to Buy?
Enterprise Products Partners is projected to offer better upside, with its inexpensive valuation (P/DCF of 7.5 assuming DCF/share of $3.30) and hefty yield likely set to push the stock higher. The stock has a Moderate Buy consensus rating based on nine Buys assigned in the past three months. At $32.75, the average Enterprise Products Partners stock forecast implies 32.4% upside potential.
Takeaway: ENB and EPD are Two Solid Dividend-Growth Opportunities
In my view, ENB and EPD are two best-in-breed picks in the oil & gas midstream industry, with a proven ability to generate robust cash flows and growing dividend payouts during both favorable and unfavorable trading environments.
Despite the euphoria that persisted amongst energy stocks in the first half of the year, shares of both ENB and EPD have not run ahead of themselves and, in fact, continue to offer quite hefty yields. Combined with their comfortable payout ratios and promising year-end DCF/share expectations, it might be a good opportunity to start accumulating their shares/units.