Last fall, Enbridge (NYSE: ENB) made a courageous strike. The Canadian pipeline and utility giant agreed to buy three natural gas companies Dominion in a $14 billion deal. The transaction would create the largest natural gas utility franchise in North America.
At the time, Enbridge CEO Greg Ebel stated, “Adding natural gas facilities of this size and quality, at a historically attractive multiple, is a once-in-a-generation opportunity.” Although it took just over a year, the company has finally seized this generational opportunity to expand its gas production utility company. The deal significantly enhances the company’s ability to maintain and grow its business 6.5% return dividend.
Closing the last phase
Enbridge recently announced that it has completed its acquisition of Public Service Company of North Carolina (PSNC) from Dominion. The deal adds more than 600,000 service customers in the state, which is served by more than 13,000 miles of gas distribution and transmission pipelines and other related gas infrastructure assets.
The utility must provide Enbridge with stable, low-risk cash flow, supported by government-regulated rate structures and stable gas demand. That cash flow should grow in the coming years as Enbridge invests in expanding PSNC’s infrastructure to support rising gas demand in its service region.
Completing the acquisition of PSNC was the final phase of this transformative transaction. Enbridge previously completed the purchase of The East Ohio Gas Company in March and completed the deal for Questar Gas Company in June.
The trio of gas companies significantly expands Enbridge’s gas distribution platform. It will generate 22% of the company’s annual adjusted earnings, before interest, taxes, depreciation and amortization (EBITDA), up from 12% before the deal. It has further diversified the company’s operations while increasing its exposure to low-carbon energy.
The new gas businesses also increased the company’s cash flow from stable regulated assets and improved its growth profile. Enbridge expects to invest 5 billion Canadian dollars ($3.7 billion) over the next three years in low-risk, quick-return projects. which will increase the income from these utilities.
Strengthening an already strong foundation
Enbridge has built one of the lowest-risk businesses in the energy infrastructure sector. The company has a diversified platform focused on four core franchises: liquids pipelines (50% of EBITDA), gas transmission and midstream (25%), gas distribution and storage (22%) and renewable energy (3%).
About 98% of the EBITDA generated by these companies comes from service fees or contracted assets, which are highly predictable and stable. It shows that Enbridge has met its annual financial expectations for eighteen years in a row, despite two major recessions and two additional periods of oil market turbulence.
The company aims to pay out 60% to 70% of its very stable cash flow to investors in the form of dividends. The rest retain the option to invest in their own business big backlog of commercially secured capital projects. The utility acquisitions have pushed its backlog to US$24 billion ($17.8 billion) of projects it must complete by 2028. These projects give the company a lot of insight into its future profit growth.
The company expects these projects to grow EBITDA by approximately 5% annually. Meanwhile, the country has additional investment capacity thanks to its strong balance sheet, which it can use to sanction additional expansion projects and make positive acquisitions, further increasing the pace of growth.
With a strong financial profile and visible earnings growth, Enbridge should have plenty of fuel to continue increasing its dividend. It could grow its dividend by as much as 5% per year over the medium term, extend a streak further currently at 29 consecutive years.
An elite dividend stock
Enbridge has taken advantage of the once-in-a-lifetime opportunity to add three high-quality gas companies to its portfolio. They increase the stability of the profit base, increase its diversification and strengthen its growth profile.
This puts Enbridge in an even stronger position to continue growing its dividend. That makes it an excellent dividend stock to buy for the long term.
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Matt DiLallo has positions in Enbridge. The Motley Fool holds and recommends positions in Enbridge. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
This 6.5% Yield Dividend Stock Just Completed the Final Stage of a Once-in-a-Generation Opportunity Originally Published by The Motley Fool
