At one point in its history, most of Enbridge‘s (NYSE: ENB) top and bottom lines were driven by its oil pipelines. A lot has changed as the North American midstream giant looks to shift along with the world toward cleaner energy sources. But one thing hasn’t changed: Enbridge is a reliable dividend payer.
Recent moves suggest that Enbridge could even be a no-brainer choice for more conservative income investors.
While the past doesn’t predict the future, particularly in finance, it is often all investors have to go on when analyzing a stock. And when it comes to Enbridge’s commitment to paying dividends, well, the past is pretty compelling. To put a number on that, the company has increased its dividend annually for 28 consecutive years.
The chart above needs a little bit of an explanation, though it clearly shows the steady upward progress in the dividend. As a Canadian company, Enbridge pays dividends in Canadian dollars. The actual dividend that U.S. investors collect will fluctuate along with exchange rates. The chart above is in U.S. dollars, and thus shows more variability than you would see if it were in Canadian dollars.
There’s an add-on issue here, though. U.S. investors have to pay Canadian taxes on the dividends they collect from Enbridge. Those taxes can be claimed back come tax time, but it is an extra bit of complication.
Back in the “old days,” which the company describes as pre-2016, nearly three quarters of Enbridge’s earnings before interest, taxes, depreciation, and amortization (EBITDA) were derived from oil pipelines. Through a series of mergers, divestments, and capital investment projects, it has gradually shifted the mix (see more below). Looking beyond 2023, Enbridge expects oil’s contribution to be roughly 50%, with natural gas up to roughly 47% from just 21% before 2016. Clean energy will stay around the same amount, falling from 5% to 3%.
Percent of EBITDA by Segment
Although oil is still a very important part of the story, it is pretty clear that Enbridge is shifting toward cleaner energy sources. It is thus tracking along with the world as it shifts from dirty fuels like coal and oil toward cleaner options like solar and wind. Natural gas, notably, is expected to be a key enabler of the transition, which explains why Enbridge is increasingly focused on that sector.
What’s interesting about this transition process is that Enbridge has largely been able to maintain its leverage at a comfortable level. Yes, as the chart above shows, there have been peaks and valleys along the way. But for the most part, management has kept leverage within a consistent range over time. That provides a solid foundation under the dividend.
Overall, Enbridge works hard so it can provide a consistent income stream to investors. That has required a material shift in the portfolio, as noted above. Another big move is coming up, with the company planning to acquire three natural gas utilities from Dominion Energy (NYSE: D) in 2024 (these acquisitions are labeled in the table below).
The utilities are regulated assets, which means that the government has to approve rates and capital investment plans. But once those items are set, these businesses are boring and reliable. Sure, slow and steady growth is the norm, but that’s exactly what Enbridge is trying to achieve. And they complement the company’s natural gas utility assets in Canada, where it expects to add over 42,000 customers in 2023 as the regions it serves continue to grow. So the Dominion purchase isn’t a case of the company trying to take on a business it knows little about.
Expected Population Growth by Utility
Over the Next Five Years
East Ohio Gas Company
Questar Gas Company
Public Service Company of North Carolina
Population growth, however, is a key driver of demand for natural gas utilities, helping to support the rate requests and investment plans of the gas provider. As the table above shows, Enbridge expects population growth to continue for the foreseeable future in the regions where the natural gas utilities it is buying operate. So by adding these assets, it is making its future growth more predictable and boring. That should be music to a conservative income investor’s ears.
All investments come with some warts. For example, while Enbridge’s leverage is at a level the company is comfortable with, it is a bit higher than the leverage of more conservative pipeline peers. Given the long history of dividend growth, however, it seems reasonable to give management the benefit of the doubt on this one. And, as noted, growth is likely to be slow and steady by design — but that will translate into slow and steady dividend growth. So the lofty 7.6% yield is likely to account for the lion’s share of your return here. For investors looking to maximize the income they generate from their portfolio, that could be a great fit.
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Reuben Gregg Brewer has positions in Dominion Energy and Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
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