Is Enbridge Stock A Buy?

Is Enbridge Stock A Buy? Companies engaged in energy products, resources, and services have taken a beating in 2020.

The global pandemic caused widespread demand to plummet, resulting in such things as oil prices hitting rock-bottom. These circumstances have led many energy companies to slash dividends.

If and when lockdowns and other restrictions become a thing of the past, oil and other sectors should see prices move steadily upward once again – meaning those who enjoy investing contrary to popular ideals, and those simply looking for value, should take note of companies like Enbridge Inc. (ENB).

Enbridge Has Paid Dividends For 65 Years

Enbridge Inc. is the largest operator of pipelines in North America. Headquartered in Calgary, Alberta, Canada, the company uses vast amounts of capital to create and upkeep large pipelines.

Enbridge approaches utility and other energy service providers to offer oil and/or natural gas transmission to the cities and states in their service areas via Enbridge’s pipelines for a fee.

These fees are then reinvested in the building and maintenance of additional pipelines – a continuous increase of Enbridge’s cash flow.

A portion of this cash flow is distributed to shareholders as dividends. When cash flow increases, so do Enbridge’s dividend payments.

Enbridge has paid dividends to shareholders for more than 65 years. Over the past decade, Enbridge has increased dividends by a Compound Annual Growth Rate (CAGR) of 14%.

Even when its share price fell 20% early in 2020, Enbridge maintained its dividends payments. As of November 23, 2020, Enbridge’s dividend payouts were $2.43 per share – a dividend yield of 8.32%.

Is Enbridge Stock A Buy?

Enbridge stock price dips during periods of economic slowdown, demand for oil falls, or major company projects get stuck in compliance, regulatory, or environmental issues.

Enbridge has ample resources and a fantastic management team that helps the company stand firm in strong headwinds. There’s plenty of room for Enbridge to continue growing as time goes on and life returns to a semblance of normal.

It wouldn’t be fair to ascertain whether Enbridge is a buy without also examining the risks of investing in this energy stock.

Risks Of Buying Enbridge Stock

At face value, Enbridge looks extremely profitable – especially from a shareholder stance. But there’s no business that doesn’t involve some type of risk.

Three risks specifically pose danger for Enbridge that could have you weighing your investment decisions a bit tougher than normal. Enbridge faces:

Regulatory & environmental issues

The company’s pipeline projects face scrutiny. It’s challenging obtaining the types of environmental permits Enbridge requires to conduct business – sometimes even tougher to actually comply with regulations. Billions of dollars are spent completing projects, and often these projects get stuck in lawsuits.

Enbridge recently made headlines when it proposed a section replacement of a pipeline in Michigan. Local environmentalists and communities opposed the work.

It’s these kinds of challenges that delay Enbridge projects and lead to increased costs. Eventually the Pipeline and HazMat Safety Administration approved the work, as the pipeline was well over 60 years old and in need of upgrades.

Compared with its peers in the space, Enbridge possesses a project execution track record much stronger. In fact, the company has seen $30 billion in projects through to completion since 2016.

Demand For Oil – or lack thereof

Enbridge is at the mercy of oil volatility, whether in price or production. Of course, Canada has its own oil, but countries in the Middle East and Russia pose stiff competition as larger producers. When those countries produce more oil, overall oil prices fall. The demand for oil also largely depends on world economy.

For example, the pandemic brought air travel to a halt, closed factories and businesses, effectively reducing demand for energy. Oil per-barrel prices sunk to less than $20 in April 2020 and oil companies had to quit production efforts to help stabilize the market and prices. Oil demand seems to be recovering, but it could be a year or more before oil demand returns to 2019 levels.

That said, there are other factors that drive demand that aren’t so short-term in thinking, such as a growing global population, urbanization of more areas, and a middle class that’s growing. Over the long term, these factors don’t fall, they steadily rise.

This leads to increased demand for energy that’s low-cost for producers and consumers. In other words, while short-term challenges have sunk Enbridge stock, it’s these long-term factors that could cause it to rise again – Enbridge is unlikely to stop paying its shareholders dividends.

Company Debt

Finally, a dent in the Enbridge armor is the company’s huge balance sheet debt entries totaling over $63 billion. $15.5 billion rests in long-term investments. The company’s debt-to-equity ratio is 97.7! However, cash flow hovers right around $10 billion.

The company’s model is resilient. It generates cash flow predictably, manages debts, and still pays dividends. But what about the competition?

Enbridge Competitors Are Well Capitalized

Enbridge’s two closest competitors include Dominion Energy and DTE Energy.

Dominion Energy was Berkshire Hathaway’s (BRK-A and BRK-B) first huge investment for 2020. Warren Buffett tends to go where he sees the flashing dollar signs, and to acquire Dominion Energy’s transmission and storage assets illustrates his optimistic view of this energy company.

DTE Energy has also seen favorable earnings estimates revisions, which is usually a signal of earnings to come. When analysts raise their earnings estimates right before an earnings call – it’s a sign of trends favoring DTE, even if mainstream investors might not think so. Wait.

In Enbridge Stock A Buy? – The Bottom Line

Well, are you in it to win it right this minute? Maybe you should pass on Enbridge for now.

Or are you a patient investor?

If you look at the three risks posed by an Enbridge investment, you’ll see it’s got some headwinds because of a global pandemic and high debt load, but so far, the company’s managed with a strongly grounded, future-facing approach.

If you like high-yield dividend investing in the energy sector, this could be the investment you’ve been waiting for. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.