Can Enbridge bear its dividend?
Enbridge (IN B -1.09%) now offers a healthy dividend yield of 6.7%. The dividend has been increased annually for 27 consecutive years, placing the company in the Dividend Aristocrat space. But that record doesn’t mean you just have to accept that the Canadian mid-wave giant can maintain that impressive streak. It is possible, but here is why you can be confident in this fact.
1. Boring business
Enbridge’s core business is its oil and gas pipelines, which represent 58% and 26% of earnings before interest, taxes, depreciation and amortization (EBITDA), respectively. These intermediate operations are paid for, so the demand for oil and natural gas is more important than the prices of raw materials, which tend to be volatile. In addition to these businesses, Enbridge also operates a natural gas utility business (12% of EBITDA) and a growing clean energy portfolio (4%). The utility business is regulated and the clean energy portfolio is governed by long-term contracts. Basically, Enbridge’s business is extremely consistent and extremely boring. But that’s a good thing when it comes to sustaining a dividend, because energy price volatility isn’t a big concern here.
2. Preparing for the future
Now, that tiny 4% of the EBITDA clean energy portfolio is perhaps the most interesting aspect of the business today. This shows that Enbridge is striving to adapt to the world around it, which will help it continue to pay its dividend over the long term. But this division is not expected to remain so small for long, given that around a third of the company’s capital expenditure plan is currently earmarked for this division. Take a step back and think about this: 4% of the business should get one-third of the capital expenditure. Enbridge is clearly looking to grow rapidly in this space to keep pace with the global clean energy zeitgeist.
3. Strong finances
Meanwhile, Enbridge has a superior balance sheet. This means that it has a solid financial base to support its business investment and growth plans. Its financial debt to EBITDA ratio, meanwhile, is in line with its peers, so there’s no reason to think it poses a greater financial risk than any of its closest competitors. Meanwhile, Enbridge’s distributable cash flow payout ratio is expected to be around 65% in 2022. That’s right in the middle of management’s 60% to 70% target. These are solid numbers all around.
4. And that extra money
But the real number to consider here is $2 billion. This is the excess cash flow that Enbridge expects to generate beyond its dividend and capital expenditure plans. Right now, he’s using most of that money to buy back stock, but it could easily be earmarked for acquisitions or other internal growth projects. The company could also pay off its debt, saving it from having to pay higher rates to refinance maturing debt. All three would help increase cash flow in the future. More directly, some of this excess cash could be used to pay dividends or to protect the current payout in the event of market adversity in the near future.
Having too much money isn’t necessarily a good thing, but it does suggest that the dividend has an extra layer of security built in. For conservative dividend investors, this could be quite attractive in an otherwise difficult stock market environment. Note that the company’s dividend is paid in Canadian dollars, so the amount US investors receive varies with exchange rates.
No problems here
When you add it all up, not only does Enbridge’s dividend look safe today, but it also looks like there’s very good reason to expect continued dividend growth in the future. If you’re trying to find a high-yield energy investment right now, this Canadian midstream giant might be a good fit.