Enbridge Stock: Sleep Well With This 7% Yield (NYSE:ENB)

Buying irreplaceable infrastructure assets is probably one of the best hedges against inflation. However, it seems as if the market treats many of the stocks in this asset class as being bond proxies. This includes Enbridge (NYSE:ENB), which currently yields 6.6%, whereas it should yield around 5% due to its mission critical infrastructure and growth potential. This article highlights why ENB appears to be a solid choice for high yield and growth potential.

Why ENB?

Enbridge is a Canadian energy company that owns and operates an impressive collection of liquids pipelines, gas transmission / distribution, and renewable power assets. To get a sense for how important its assets, are ENB transports around a quarter of the crude oil used in North America, and one-fifth of the natural gas consumed in the U.S.

Plus, ENB’s diversified model is a key differentiator as it also has a gas distribution network serving nearly 4 million retail customers in Ontario and Quebec, Canada. This utility business gives ENB another source of stable and recurring income that complements its other cash flows form the midstream business.

Moreover, ENB is well ahead of its midstream peers in its expansion into renewables. This is reflected by the over C$8 billion invested in renewable energy since 2002. ENB has plenty of growth runway in the US due to favorable legislation. As shown below, onshore renewable capacity for wind and solar energy is expected to substantially grow over the next few decades.

Meanwhile, ENB’s traditional fossil fuels business is doing well, with systems having been highly utilized in 2022. This includes mainline volume strength that management expects to reach 2.95 million barrels per day on average for the full year 2022. ENB also has plenty of opportunity to expand its LNG export capabilities, given higher demand for natural gas in Europe over the past year. As shown below, ENB is well positioned to expand its key LNG export assets along the Gulf Coast.

Plus, management has proven to be adept at recycling capital into higher return projects. This includes the recent C$1.12 billion sale of select Regional Oil Sands assets, which goes a long ways in funding is recent acquisition of Tri Global Energy, which fits into ENB’s renewable strategy as noted by management during the last conference call:

The acquisition of Tri Global Energy brings our capabilities and strategy to yet another level. The Tri Global team fills in, what I call the front end of our renewables value chain and gives us extensive origination capability being resource assessment, site prospecting, land and environment and great interconnection. TGE brings a great development track record in a variety of markets having monetized 6 gigawatts or 24 projects.

The TGE front end is highly synergistic with our commercial, EPC and operating capability. What we really like is that TGE allows us to quickly exploit our own lands and existing development opportunities. The deal also comes with a contracted revenue stream on monetized projects so good early cash flows. And the big prize is 3 gigawatts in late-stage development projects slated for in-service between 2024 and 2028 and many of those overlap with our existing operations.

Importantly, ENB carries a strong BBB+ rated balance sheet, with 90% of its debt being held at fixed rates, and management is hedging its floating rate debt to minimize risk. In a show of confidence, management recently upped its dividend by 3% to C$0.8875, and the dividend is well covered by a 66% payout ratio, based on the midpoint of management’s DCF per share guidance of C$5.35 for the full year 2022.

Turning to valuation, I find ENB to be reasonably attractive at the current price of $39.61 with a price to cash flow of 11.7. While this is more or less in line with recent valuations, I believe ENB deserves a higher multiple due to its leadership position in transitioning to renewables and its growth potential in this arena. Meanwhile, investors get to enjoy a healthy 6.7% dividend yield that’s well covered by distributable cash flow from this quality enterprise.

Investor Takeaway

ENB is a top-tier energy company with multiple-levers and offers investors exposure to the energy transition. The company’s renewables business should provide growth runway in the US, while its traditional midstream business continues to generate strong cash flows. For these reasons, I think ENB is an attractive long-term opportunity at current prices all while paying investors well-covered high dividend yield.