Enbridge(NYSE: ENB) has been an exceptional investment over the decades. The Canadian pipeline and utility operator has delivered more than an 11% compound annual total return over the past 20 years. That has outpaced the S&P 500 and its nearly 10% annualized total return, and its peers in the utilities and midstream sectors, with about 8% average annual total returns.
The energy infrastructure company could produce even higher total returns in the coming years. One factor fueling that view is its ability to capture a “once-in-a-generation” acquisition opportunity that it will close in phases this year. That deal will enhance its operations and growth profile, giving it more fuel to increase its 7.5%-yielding dividend.
Snaring a once-in-a-generation opportunity
Last September, Enbridge agreed to buy three natural gas utilities from Dominion for $14 billion. The transaction will create North America’s largest natural gas utility platform with 7 million customers. It’s paying a very reasonable price for the utilities at about 1.3 times their enterprise value-to-rate base and 16.5 times price-to-earnings.
“Adding natural gas utilities of this scale and quality, at a historically attractive multiple, is a once-in-a-generation opportunity,” stated CEO Greg Ebel in the press release unveiling the transaction. He further noted that Enbridge expects the deal to be accretive to its distributable cash flow per share in the first year of full ownership, which should increase over time, powered by their strong growth profiles.
Enbridge recently closed the purchase of The East Ohio Gas Company, the first of its three gas utility acquisitions from Dominion. “The addition of a strong Ohio-based gas utility company is a great strategic fit for Enbridge. It further diversifies our business and enhances the stable cash flow profile of our assets,” stated Michele Harradence, the president of gas distribution and storage at Enbridge. Harradence further noted: “Natural gas utilities have long useful lives and are ‘must-have’ infrastructure for providing safe, reliable, and affordable energy. This gas utility will help blend and extend our cash flow growth outlook through the end of the decade by adding a steady, regulated investment that supports our long-term dividend profile.”
The fuel to grow shareholder value
Enbridge expects to close the other two gas utility acquisitions from Dominion later this year. Once it does, the company will get 22% of its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) from the very stable gas utility sector. That will further diversify its business mix while reducing the earnings contribution of its liquids pipelines segment to 50% of the total, with the rest coming from gas transmission (25%) and renewable power (3%).
The shift toward lower carbon energy will pay dividends over the long term. It should provide Enbridge with additional growth opportunities.
That has already been the case this year. The company recently formed a natural gas pipeline and storage joint venture connecting the Permian Basin to the U.S. Gulf Coast region. That deal will further diversify its cash flow and provide a near-term boost with future growth upside.
These investments have helped enhance Enbridge’s long-term growth visibility. The company expects to grow its adjusted EBITDA by 7% to 9% annually through 2026, with its distributable cash flow rising by around a 3%-per-share pace, slowed in the near term by tax changes and a higher share count to pay for the Dominion transactions. Meanwhile, fading headwinds should help drive accelerated cash flow per share growth of 5% annually after 2026, with adjusted EBITDA likely to rise at a similar pace.
Add Enbridge’s already high 7.5% dividend yield to its growing cash flow per share of 3% to 5% annually over the long term, and the company should produce total annual returns in the 10%-12% range. That’s a very strong return from such a low-risk dividend stock.
An incredible investment opportunity
Enbridge is capitalizing on a once-in-a-generation opportunity to acquire three high-quality gas utilities. Those deals will significantly enhance the sustainability of its cash flows and its growth profile. Add in its other growth drivers, and Enbridge should have the fuel to produce strong total returns over the long term. That makes it a great stock to buy and hold for the long haul this month, especially for those seeking an attractive and growing income stream.
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Matt DiLallo has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
