Enbridge (NYSE:ENB) is an integrated energy company that specializes in the transportation of natural gas and crude oil. The company provides much of the United States with natural gas and currently has a market capitalization exceeding $70 billion.
Like many energy companies, Enbridge also offers its shareholders large dividends out of the cash produced by its operations. This year, however, Enbridge’s share price has fallen by 13.8 percent while its dividend yield has risen to nearly 7.93%.
This calls into question whether Enbridge can maintain its dividends at their current level. Here’s what you need to know about Enbridge’s dividend payouts and whether the stock is a value trap.
A Brief Look at Enbridge’s Dividend
Enbridge currently pays $2.6334 per share annually and yields 7.93%.
The company has managed to maintain a rapid rate of dividend increases over many years, with the 10-year compounded dividend growth rate standing at 15.6 percent.
It does however have a payout ratio of 179%, and that’s where the concerns lie, which we’ll address below.
The higher the payout ratio, after all, the less likely the dividend will be sustainable over the long haul.
The Concern Over Enbridge’s Dividend Safety
On the surface, Enbridge seems like a natural choice for dividend investors. There are, however, some drawbacks that could threaten the otherwise enticing payout.
The first of these is the company’s extremely high dividend payout ratio. In the most recent quarter, for example, Enbridge reported earnings of $0.91 per share. The dividend, meanwhile, was $0.89 per share. This tiny spread could make it difficult for management to maintain or raise the dividend during challenging times.
Enbridge’s debt is a concern in today’s rising interest rate environment. The company’s current debt-to-equity ratio is 1.27. This is higher than is normally considered safe, though not unusual for a capital-intensive company like Enbridge.
The main factor that has driven Enbridge’s share prices down and yields up, however, is the pending closure of its Line 5 crude oil pipeline between the US and Canada.
On June 17th, a federal judge ruled against Enbridge and ordered it to close the pipeline in response to complaints brought against the company by the Bad River Band of the Lake Superior Chippewa. If the pipeline remains closed, Enbridge could permanently lose a highly profitable piece of infrastructure.
It’s Not All Bad News
While the concerns outlined cannot be dismissed, there’s still a good deal to like about Enbridge. Regarding Line 5, it’s important to note that Enbridge also owns the alternative Line 6 pipeline that will likely serve as the main route for Canadian crude oil to reach the American Midwest in place of Line 5.
Yes, the company will have to invest in additional infrastructure to transport the natural gas that Line 5 also carried, but Enbridge will likely remain the dominant force in ferrying fossil fuels from Canada into the Northern United States.
It’s also important to consider that Enbridge will have some lead time to get ahead of the effects of the closure. Per the June ruling, Enbridge can continue to operate Line 5 through mid-2026. In the interim, the company can make logistical plans for alternative transportation or attempt to find a solution that will keep Line 5 open.
Turning to the secondary financial risks, the debt load is not as burdensome as it may seem at first glance. While a debt-to-equity ratio over 1.0 is typically concerning, Enbridge’s debts have been taken on in order to drive the company’s growth.
In addition to its existing infrastructure, the company is currently working on $17 billion in expansion projects. These projects have the potential to generate considerable returns and replace lost income from the Line 5 pipeline.
The Elephant In The Room Is The Dividend Payout
Enbridge’s dividend payout ratio problem could be somewhat more substantial. Even if a small dividend cut did occur, however, the stock’s yield could remain high enough to produce a boatload of income for investors.
With the S&P 500 average yield currently sitting at just 1.5 percent, Enbridge would have to suffer a drastic cut to significantly diminish its income appeal.
Enbridge appears to be far from the end of its growth runway. In the most recent quarter, the company reported an 8% increase in its adjusted EBITDA over the previous year. Earnings also surged, rising from just $0.5 billion a year ago to $1.8 billion in Q2.
Revenues Should Tick Up Higher
Looking forward, there are several projects in Enbridge’s pipeline that could drive further increases in revenues and earnings. One of these projects is its Rio Bravo Pipeline, which could eventually transport up to 4.5 billion cubic feet of natural gas per day. This fuel will ultimately be shipped abroad, allowing Enbridge to broaden its footprint in the international natural gas market.
Domestically, Enbridge is also building a massive utility network. Thanks to a recent acquisition of three utility firms from Dominion Energy, Enbridge is now North America’s largest natural gas utility company.
Enbridge expects these acquisitions to contribute to its distributable cash within the first year of operations and projects an ongoing compounded growth rate of 8 percent on its investment thereafter. Further acquisitions along these lines could add to Enbridge’s total cash flows in the future.
Analysts are also bullish on the potential for Enbridge share prices to rise this year. The consensus target price for the stock is $40.41. If that were realized, investors could enjoy a bull run to the tune of over 20%. Even the lowest price target of $36.67 would imply a stock climb of more than 10%.
Is Enbridge Dividend Safe?
The high payout ratio for Enbridge dividend puts its safety into question. Investors should be wary that it will be sustained given that it competes heavily with cash flows for operations.
Taking the company’s improving earnings and potential for future growth into account, Enbridge could be a good buy at today’s prices. While the risks the company faces are very real, the potential rewards seem to outweigh them.
Risk-tolerant investors seeking long-term income growth opportunities may want to take this opportunity to buy small positions in Enbridge while share prices remain muted.
It’s important to note, however, that Enbridge may see additional volatility in the near term. In addition, further legal developments or more concrete data regarding the costs of the Line 5 closure could drive share prices down further. As such, Enbridge may be most suitable for investors willing to buy and hold through a substantially volatile period.
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