Concerns Over Economic Downturn
There are growing concerns that the economy could be heading toward a recession. Higher interest rates are beginning to affect economic growth, and many worry that if the Federal Reserve delays cutting rates, it could lead to a recession.
While a recession may significantly impact some companies, it is unlikely to affect Enbridge (NYSE: ENB) at all. Enbridge, a leading North American pipeline and utility operator, generates very durable cash flow and has clear growth prospects. Therefore, even if a recession occurs next year, Enbridge will have ample resources to continue increasing its nearly 7%-yielding dividend.
A Track Record of Consistency
Enbridge has consistently paid dividends to its investors for over 69 straight years. Recently, the company marked its 29th consecutive year of increasing its payout, raising its dividend by 3.1% this year, which includes three recessions and several notable downturns in the oil market.
The company's low-risk business model significantly contributes to its remarkable consistency. Enbridge currently derives 98% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) from stable cost-of-service or contracted assets. Its earnings predictability is so high that it has met its annual financial guidance for 18 consecutive years, encompassing two recessions and two other periods of oil market volatility.
Enhancing Earnings Stability
Enbridge is focusing on enhancing the stability of its earnings profile by upgrading its asset portfolio. The company has sold off assets with commodity price exposure and reinvested that capital into more stable assets, including three natural gas utilities it is acquiring from Dominion.
The company's financial profile is also incredibly conservative. Enbridge maintains a reasonable dividend payout ratio of 60% to 70% of its stable cash flow, allowing it to retain billions of dollars in excess cash flow annually for new investments and to maintain a robust balance sheet. Currently, Enbridge has an investment-grade credit rating, attributable to a leverage ratio that is at the low end of its target range of 4.5-5.0 times. As the company fully captures the benefits of its utility acquisitions, it expects leverage to decrease further.
Future Growth Potential
Enbridge anticipates that its utility acquisitions will significantly impact cash flow starting in 2025. The company expects these acquisitions to be accretive to cash flow within the first full year of ownership, with increasing benefits over time. Over the next three years, Enbridge plans to invest several billion dollars in capital in these utilities, expecting to drive an 8% earnings growth rate.
The capital projects undertaken by Enbridge represent just a portion of its extensive backlog. The company's secured capital program currently stands at 24 billion Canadian dollars ($17.7 billion). It has multiple projects under construction slated to come online through 2028, including new natural gas pipelines, oil storage and export capacities, offshore wind farms, and more.
The secured capital project backlog is projected to grow Enbridge's EBITDA by around 3% annually. Additionally, the company anticipates cost savings and optimizations will contribute another 1% to 2% growth to its bottom line each year.
To support its growth ambitions, the company's secured growth program will require CA$6 billion-CA$7 billion ($4.4 billion-$5.2 billion) annually. This figure is within its capacity of CA$8 billion-CA$9 billion ($5.9 billion-$6.6 billion) in annual investment capability, which considers the excess free cash flow after dividend payments and the capacity for additional debt. Utilizing this excess capacity for acquisitions or additional capital projects could augment its annual earnings growth rate further.
With earnings projected to grow by around 5% per year, Enbridge is well-positioned to continue increasing its dividend payouts. It envisions a potential increase of around 3% annually through 2026, with prospects of raising payouts by as much as 5% per year after that.
Historical Trends in Dividend Payouts
Enbridge has successfully navigated recessions for decades, attributed to the stable nature of its low-risk business model. The company generates reliably increasing earnings and cash flow. Given its solid financial profile and growth visibility, this trend is expected to continue well into 2025 and beyond, solidifying Enbridge as a low-risk dividend stock option amidst recessionary fears.
Frequently Asked Questions
1. What is Enbridge's approach to managing economic uncertainties?
Enbridge maintains a conservative financial profile and stable cash flow, allowing it to navigate economic uncertainties effectively.
2. How long has Enbridge been paying dividends?
Enbridge has a long-standing commitment to its investors, having paid dividends for over 69 consecutive years.
3. What growth initiatives is Enbridge currently pursuing?
Enbridge is focusing on utility acquisitions and capital investments in infrastructure, expected to drive substantial growth in the coming years.
4. How does Enbridge’s financial strength compare to its industry?
Enbridge boasts a strong investment-grade credit rating and maintains a conservative leverage ratio, positioning it favorably within the industry.
5. What dividend growth can investors expect from Enbridge?
Investors can anticipate potential dividend increases of around 3% annually through 2026, with prospects for higher increases thereafter.
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