Enbridge (NYSE: ENB) is one of the most sustainable dividend stocks in the energy sector. The Canadian pipeline and utility company has been paying dividends to its investors for more than 69 years. It has increased its payments for the past 29 years in a row. That’s impressive, considering all the volatility in the energy sector over the years.
The energy company has enough fuel to continue paying dividends. Immediately dividend yield above 6.5% and more growth to come, it’s an excellent option for those looking for a terribly financeable income stream.
Built to be reliable
Enbridge has four core franchises: lliquids pipelines, accounting for 50% of modified pipelines EBITDA; gas transportation and midstream, 25%; gas distribution and storage, 22%; and renewable energy, 3%. They provide the company with terribly predictable profits supported by cost-of-service agreements and long-term contracts, which in total represent 98% of EBITDA. This predictability has become clearly visible over the past eighteen years. Enbridge has achieved its financial goals every year, despite two major recessions two additional periods of turbulence in the oil market.
The pipeline And utility company pays out 60% to 70% of its stable cash flow in dividends every year. That’s a conservative payout ratio for a company with such a payout stable cash flow. It gives Enbridge plenty of room for error while allowing the company to maintain meaningful cash flow to fund expansion projects and additional acquisitions.
Enbridge also has a rock-solid financial foundation. Thanks to the strategy of using and holding long-term fixed-rate debt leverage ratio low, it has an investment grade credit rating. It ended the second quarter with a leverage ratio of 4.7, which was in the middle of the target range of 4.5 to 5.0. It sees its leverage ratio moving toward the lower end of that range next year as it leverages the full benefits of its recent natural gas company acquisitions and maintains its current investment range.
These characteristics ensure that Enbridge’s high-yield dividend is on a highly sustainable footing. It generates enough post-dividend free cash flow to fund a significant portion of its funded capital program. In the meantime, the country has the balance sheet capacity to finance the rest, while there is still room left. This provides additional flexibility to take advantage of future growth opportunities as they arise.
The fuel to grow
Enbridge ended the second quarter with a backlog of 24 billion Canadian dollars ($17.8 billion) in secured capital projects. These projects include oil terminal expansions, new gas pipelines, natural gas utility expansions and renewable energy projects. The company expects these projects to be commercially available through 2028. That gives Enbridge tremendous insight into its future growth.
These secured capital projects should grow the company’s EBITDA by approximately 3% per year until 2026. Meanwhile, cost savings and optimizations will add another 1% to 2% to the bottom line each year. Furthermore, Enbridge has significant additional investment capacity that it could leverage to add another 1%-plus to its annual earnings growth. It sees the potential to grow its revenues by around 5% annually after 2026 the capital projects it has under construction development.
The company’s visible earnings growth drives the view that it should have enough fuel to keep increasing its dividend. In the medium term, the country could increase its payments by up to 5% per year.
Sufficient power to continue paying dividends
Enbridge is one of the most reliable dividend stocks in the energy sector through the decades. That trend should continue in the future. The company has a very low-risk business model and visible growth prospects, so it should have no trouble paying dividends in the future, with the payout likely to continue rising in the coming years. That makes it a great one stock buy for those looking for one terribly sustainable stream of dividend income.
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Matt DiLallo has positions in Enbridge. The Motley Fool holds and recommends positions in Enbridge. The Motley Fool has a disclosure policy.
This 6.5% yield stock has paid dividends for almost 70 years and has plenty of fuel to keep paying them. originally published by The Motley Fool
