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Enbridge is an Alberta-based multinational pipeline company that owns and operates pipelines across Canada and the United States for transporting crude oil, natural gas, and natural gas liquids. The company has the most comprehensive pipeline system in the North American region and primarily operates across five major segments, i.e., Liquids Pipelines, Gas Transmission and Midstream, Gas Distribution and Storage, Renewable Power Generation, and Energy Services.
Enbridge stock has a fantastic track record of preserving its growth. Backed by solid orbital growth, substantial business utilization, and impressive operational performance, the company has survived some of the harshest economic conditions over the years. This was possible because the company maintained a low-risk business model based on long-term contracts that ensured a continuous cash inflow. Moreover, its dual strategy of focusing on conventional pipelines and investing in low-carbon opportunities has enabled Enbridge to maintain its pace of growth. In recent times the current inflationary environment has also largely favored the growth of oil and gas companies like Enbridge.
The Enbridge stock has gained almost 13% in 2022 compared to the broader TSX’s -6.13% fall. Enbridge is an essential component of most Canadian-focused mutual fund portfolios as well. The company is a safe port during choppy waters.
The market is optimistic about this massive oil and gas distributor’s future performance. This could be due to the following factors:
Tremendous Growth Ahead for Carbon Fuel
Consistent global pollution levels have forced people to be more environmentally cautious. There has been a gradual shift towards the preference for renewable energy sources among the masses. Still, it is not easy to get rid of carbon fuels that easily. The global tension relating to the world’s energy market has further proved that the world is not yet wholly ready to replace the existing carbon infrastructure. Therefore, natural gas is preferred these days to displace dirtier alternatives like coal and oil.
Enbridge is indeed moving towards building a clean energy portfolio, but to this date, almost 96% of the company’s business is still tied to carbon fuels. Moreover, it has been looking for ways to grow its natural gas business at the expense of its oil business.
For instance, the company has decided to build a new liquefied natural gas (LNG) export facility in Canada, which is expected to be completed by 2027 and has already secured contracts from the integrated energy giant BP for a majority of its throughput. This project holds much value to Enbridge as the company believes exports of LNG globally will take a massive 90% leap in 2040 compared to the 2021 levels. Only 20% of its natural gas supplies are used in LNG exports, which will rise to 30% by 2040. Further, the LNG seems ideally placed as the company will be able to enjoy cost benefits resulting from the shorter travel distances to Asian markets.
One of the primary reasons for owning the Enbridge stock is that the company is highly focused on seeking growth. The company already has a healthy balance sheet, is consistently increasing its dividend payments, and is experiencing solid organic growth. And still, it continues to hunt for growth.
For instance, Enbridge spent $4.5 billion this year on all its newly sanctioned growth projects. Out of all the investments it has made so far this year, its investment in BC Pipeline System is expected to be the most beneficial for its top line. Such an inference has been made considering the rising demand for solid natural gas and the associated increased export levels in the current times.
Besides, the investment in the Woodfibre LNG facility is also apt for its low-risk pipeline-utility commercial model and might generate attractive returns in the coming times. Besides that, its recent joint venture with Phillips 66 to assume operations of the Gray Oak oil pipeline with a 58.5% share is also expected to boost its US Gulf Coast export position.
A Dividend King
Enbridge can be rightly labeled as a Dividend King. The company comes with a dividend yield of as high as 6.13%. The best thing about the Enbridge stock is that it has paid regular dividends consistently over the years and has increased its dividend payments consecutively over the past 27 years. Moreover, the fact worth noting is that Enbridge has hiked its dividend payouts even during periods of high uncertainty and crisis, thereby demonstrating its high resilience in the volatile oil industry.
Enbridge usually serves its consumers under long-term, fee-based contracts and thus can always maintain steady and stable cash flows. Enbridge has consistent cash flows from its operations and has entered several new projects these days. These activities suggest Enbridge will be able to continue with its trend of paying and hiking its dividend payouts even in the coming periods.
The company expects to raise its distributable cash flow (DCF) per share by around 5% to 7% on average between 2021 and 2024. This expected range includes a projected growth rate of 8% for the current year. Another worthy fact is that if American investors are holding their stock in an IRA, they won’t be subjected to Canadian withholding taxes, which American investors have to face usually.
The Enbridge stock closed on August 19 at $56.25, with an average target price of $60.37, a potential upside of around 7.3%. When you add the 6.13% dividend yield to it, you are looking at a return of about 13%, which is not bad in this market.
Enbridge has impressive fundamentals, and its cash flows are highly recession-resistant. Therefore, the company will be able to keep up with its healthy operational performance even if a recession comes up in the upcoming years. Also, the dividend offered by the company is quite attractive considering the current market scenario and inflation levels as a whole.
So, this great combination of recession resistance, low risk of financial distress, and hefty dividend payouts make Enbridge stock an easy buying option in this market. Investors looking for a recession-resistant stock with solid growth prospects might consider buying Enbridge.
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