Buy Enbridge for growth and income

Having taken steps to improve the resiliency of its business, Enbridge has delivered solid financial results and higher distributable cash flow so far this year.

These past few years, Enbridge has taken steps to improve the resiliency of its business. The company has diversified its business mix to natural gas, sold its gas gathering and processing business, and significantly reduced leverage while moving to an equity self-funding model.

It has also simplified its corporate structure and reduced overhead while executing on $30 billion of capital projects. Together, these initiatives put it in a strong position coming into 2020 before the COVID-19 pandemic broke out. Consequently, it has delivered solid financial results so far this year.

Enbridge Inc. (TSX—ENB; NYSE—ENB) is a leading North American energy infrastructure company. Its core businesses include: liquids pipelines, which transports about 25 per cent of the crude oil produced in North America; gas transmission and midstream, which transports about 20 per cent of the natural gas consumed in the US; gas distribution and storage, which serves about 3.8 million retail customers in Ontario and Quebec; and renewable power generation, which generates about 1,750 megawatts of renewable power in North America and Europe.

Financial results hold up well

For the second quarter ended June 30, 2020, Enbridge made $1.1 billion (adjusted), or $0.56 a share, compared with $1.3 billion, or $0.67 a share, in the same period of 2019. The consensus of analysts’ estimates had called for the company to earn $0.55 a share in the latest period.

The decrease was primarily driven by reduced capitalized interest and higher depreciation from new assets placed into service throughout 2019.

However, distributable cash flow (DCF) for the quarter was $2.4 billion, up 5.5 per cent from the year before. The increase was driven partly by lower maintenance capital expenditures due to the timing of spending in light of COVID-19.

But it also reflected a 3.4-per-cent increase in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) to $3.3 billion. This increase was driven by strong utilization of the company’s gas pipelines and utility, incremental earnings from positive rate settlements on the Texas Eastern system, contributions from new assets placed into service throughout 2019 and the first quarter of this year, and energy services profits from favourable storage opportunities.

DCF is important because it represents the amount of cash available to distribute to shareholders in the form of dividends. Enbridge’s second-quarter and first-half DCF exceeded expectations. Consequently, the company thinks it’s on track to generate 2020 DCF within its original guidance range of $4.50 to $4.80 a share. That’s more than adequate to cover its current annual dividend of $3.24 a share.

Mind you, Enbridge will face headwinds in the second half of the year due to COVID-19 and other factors. But the company remains well positioned for long-term growth.

The stock trades at a reasonable 17.4 times the $2.50 a share Enbridge will probably earn in 2020. Its dividend yields 7.4 per cent. Enbridge is a buy for growth and income.

This is an edited version of an article that was originally published for subscribers in the August 28, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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