Enbridge (NYSE: ENB) has been one of the best dividend-paying stocks in the energy patch. The Canadian energy infrastructure company has paid dividends for more than 68 years, increasing them in each of the last 28 years.
Powering the steady rise in Enbridge's payout is its brilliant strategy. The company has an extremely low-risk business model of operating pipelines and utility assets that generate very stable income. It uses that steady cash flow to pay dividends (it currently yields 7.7%) and invest in additional income-producing energy infrastructure assets. It recently added more power to its dividend growth engine by agreeing to invest in a solar energy project. The investment also enhances its smart energy transition strategy.
Checks all the boxes
Enbridge recently agreed to participate in the construction and operation of the Fox Squirrel solar project in Ohio. It will own a 50% interest in the joint venture with EDF Renewables. The Canadian Energy infrastructure company will invest $149 million into the first development phase. That 150-megawatt (MW) project should start producing power and generating income by the end of this year.
Enbridge and EDF Renewables could ultimately build three phases that deliver up to 577 MW of solar power to the grid by the end of next year. That's enough to provide electricity for about 118,000 homes. The partners will sell 100% of the power produced from Fox Squirrel under 20-year fixed-price power purchase agreements. That contract structure will provide them with very stable cash flow.
The investment checks all the boxes for Enbridge. It's "expected to be immediately accretive to DCF (distributable cash flow) per share and will be complementary to both our growth outlook and energy transition leadership," stated Matthew Akman, the president of Enbridge's power division, in the press release unveiling the investment. Because it's accretive to Enbridge's cash flow, the investment will help support the company's ability to continue increasing its dividend.
Building a more sustainable income source
This investment continues Enbridge's methodical strategy of slowly transitioning its business to lower-carbon energy. Before 2016, 74% of Enbridge's earnings came from its liquids pipeline platform, which features the world's longest and most complex crude oil and liquids transportation system. However, that number has slowly declined over the years as Enbridge has focused on investing in expanding its lower-carbon platforms (gas transmission, gas distribution, and renewable energy).
Enbridge currently gets 57% of its earnings from liquids pipelines. That will fall to 50% next year. The company's pending $14 billion acquisition of three natural gas utilities from Dominion is a big driver. In addition, Enbridge recently agreed to a $1.2 billion deal to buy seven operating landfill-to-renewable natural gas (RNG) facilities, and will spend 625 million euros ($678 million) to roughly double its stake in two offshore wind farms in Germany. These deals will be immediately accretive to its DCF, while the latter two transactions will enhance its energy transition strategy.
The company also has an extensive and growing pipeline of capital projects under construction. Its backlog stood at 24 billion Canadian dollars ($17.6 billion) at the end of the third quarter. All but about $300 million of those investments are on lower-carbon opportunities. They include natural gas pipeline expansions, a liquefied natural gas project, RNG projects, gas utility expansions, and several more offshore wind farms in Europe.
Enbridge also has several lower-carbon projects under development. Potential future projects include additional European offshore wind farms, a blue ammonia export project in the U.S., green hydrogen projects, and carbon capture and storage opportunities.
The company's investments in lower-carbon energy will make its cash flows much more sustainable over the long term. They should also give it more power to continue increasing its dividend.
A smart approach
Enbridge has a brilliant strategy to continue increasing its dividend. It's methodically transitioning its business to lower-carbon energy by using some of the cash flows from its fossil fuels businesses to invest in infrastructure to support a clean energy future. That's making its dividend more sustainable while ensuring it has the power to continue increasing its payout.
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