Pipelines are currently a sensitive topic here in Alberta. Without a doubt, they are the most efficient way to move oil from point A to point B. We are currently just having some logistical and environment difficulties in getting more built.
But the fact of the matter is, oil and gas is going to be around for the foreseeable future while we transition to renewable energy companies. And while we’re still relying on petroleum products, we may as well take advantage of companies that have a stranglehold on the industry.
With such harsh regulatory approvals and billions of dollars in investments needed by pipeline companies to fund growth, it’s pretty hard for a newcomer to come into the industry and gain any sort of ground. When you think of Canadian pipeline companies, there are only four that stand out in my mind. Inter Pipeline, Pembina Pipeline, TC Energy and last but not least, Enbridge (TSX:ENB).
Why can Enbridge (TSE:ENB) pay such a high dividend?
Enbridge’s Mainline system covers over 70% of Canada’s pipeline network. It’s not a full blown monopoly, but it’s pretty darn close. The company is also migrating towards a pure pipeline utility model. Enbridge’s pipelines essentially act like a toll operator, generating revenue for product that flows through its pipelines. As such, cash flows are extremely stable, predictable and most importantly, bountiful.
Enbridge generates significant cash flows from operations, generating over $8.6 billion in the last 12 months. Free cash flows have fallen more than 33% compared to last year, but it’s important to note that the company has spent over $6.5 billion dollars this year on investments into new projects. These projects, including the Line 3 Replacement that is set to be completed by the end of 2019, will only increase the company’s top and bottom lines.
With significant cash flows like this, Enbridge can afford to pay out a huge dividend. And even though Enbridge’s dividend looks like it could be teetering along the lines of being too lucrative, history shows it will be just fine.
How stable is Enbridge’s dividend?
At first glance, it seems that Enbridge is dishing out a little more than it can handle in terms of dividends. The company’s payout ratio is currently 119% and with only $2 billion in free cash flows thus far and $5 billion in dividends issued, most income investors at quick glance would be running for the hills.
However, Enbridge continues to impress in terms of both dividends paid and dividend growth. The company has raised dividends consecutively for nearly a quarter century at 23 years, and its 5 year dividend growth rate sits at an impressive 16%. With a yield of 6.37% at the time of writing, I’d consider Enbridge one of the best dividend paying stocks in the country.
The oil and gas bear market has also done wonders to its share price for prospective buyers. Enbridge has fallen from the $52 range back in late 2014 to $46.88 at the time of writing. The stock is currently trading at 16.9 times forward earnings and 1.52 times book value. This places Enbridge in the upper echelon of pipeline stocks in terms of valuation, but with its track record and history of rewarding shareholders, I’d still consider the company well within comfortable price range.
With its rock solid dividend, nearly $19 billion in upcoming projects and the demand of oil and gas products increasing, you may want to think about locking this Canadian dividend aristocrat in your portfolio today.