Markets
ENB

Is Enbridge a Buy?

Enbridge (NYSE: ENB) has generated solid returns for its investors this year. Shares of the Canadian energy company have gained about 18% so far in 2019. Add in the company's dividend, and the total return is nearly 24%, which is just ahead of the red-hot S&P 500.

On the one hand, Enbridge's rally this year means that its shares are no longer quite the bargain they once were. However, after digging into the numbers, it's easy to see more upside ahead for Enbridge. Here's a look at three reasons investors should consider buying shares of the Canadian pipeline giant.

The word dividends written on a sticky note near a roll of money and a calculator

Image source: Getty Images.

1. It's still relatively cheap when looking ahead to 2020

Enbridge currently believes it can produce about 8.9 billion Canadian dollars ($6.8 billion), or roughly CA$4.45 per share ($3.41), of distributable cash flow this year. That's only about 1% higher than last year, due in large part to the timing of its expansion projects. The company currently expects to finish CA$9 billion ($6.9 billion) of projects this year, and another several billion dollars' worth in 2020. Those expansions should boost its cash flow up to at least CA$5 per share ($3.83) in 2020, up about 12% from 2019's midpoint.

Enbridge's stock recently traded at less than $37 per share, implying that the company sells for less than 10 times 2020's cash flow. That's still a relatively inexpensive level, considering that many of its large pipeline peers sell for around 11 times cash flow.

2. There's plenty more growth where that came from

Enbridge believes it can continue growing its cash flow at a healthy pace well beyond next year. In the company's view, it has enough financial flexibility to fund CA$5 billion to CA$6 billion ($3.8 billion to $4.6 billion) of expansions per year. That should support annual cash flow growth of 5% to 7%.

The company has already secured several projects to drive growth beyond next year. Enbridge, for example, has two gas pipelines, Spruce Ridge and the T-South Expansion, on track to start up in 2021. Meanwhile, it has a new offshore wind farm in France that it expects to finish in 2022. It has several other smaller projects under construction, including more gas pipelines and expansions at its utilities.

In addition, Enbridge has a growing list of growth projects in development. For example, it's developing an offshore oil export terminal in Texas that could come online in late 2021 to early 2022. It's also partnering on a gas pipeline that would support a proposed LNG (liquefied natural gas) export facility that could start up by 2023. On top of that, it has three more offshore wind farms under development in Europe that could begin coming online in 2023. The breadth of the company's development pipeline enhances its ability to grow at the high end of its target range.

3. Let's not forget about that high-yielding dividend

A final factor in Enbridge's favor is its dividend, which currently yields a well-above-average 6%. That payout is on as firm a foundation as investors will likely find in the oil patch. First of all, long-term contracts and other stable sources lock in about 98% of its cash flow. Meanwhile, it only pays out about 65% of those funds via the dividend. It tops off that solid financial profile with an investment-grade balance sheet that boasts improving credit metrics.

The company's healthy finances and near-term growth prospects lead it to believe that it can increase its dividend by another 10% next year. Meanwhile, its longer-term outlook should be able to support dividend growth that matches its earnings growth rate of 5% to 7% per year.

The trifecta

Enbridge has all the characteristics that investors typically look for in a stock to buy. It has visible growth prospects, pays an attractive dividend, and trades at a relatively low valuation. Thanks to those factors, the company should be able to continue generating market-beating total returns over the long term, making it a great stock to buy right now.

10 stocks we like better than Enbridge
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Enbridge wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

 

*Stock Advisor returns as of June 1, 2019

 

Matthew DiLallo owns shares of Enbridge. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

ENB

Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More