Energy Company of the Future

It’s been a volatile year for investors in the major market averages and while some growth stocks have done quite well and climbed more than 50% off their lows, most have struggled to make much upside progress with gains being fleeting.

This is frustrating to say the least for many investors, and especially those that aren’t proficient at trading that are just trying to make a consistent 7%+ per year to beat or at least offset inflation.

Given that staples have been bid up to extreme levels in some cases, hunting for yield has been tough.

One could argue that “safe” stocks have been just as risky as growth stocks or small-cap names given where they are trading in the upper portion of their 10-year ranges from a valuation standpoint and near all-time highs.

This has meant that while investors might be able to lock in 2-4% yields and lower beta, they are taking on enormous risk given that many of these stocks are susceptible to 15-20% corrections with staples becoming somewhat of a crowded trade in this turbulent environment.

Fortunately, the recent pullback in the market and especially the energy sector has left some value stocks trading at very reasonable valuations and also returning upwards of 6% to shareholders per year.

One example is a large-cap name paying a 7.2% forward yield that also has a $1.2 billion buyback program in place, equal to up to 1.5% of the float at current prices. In my view, this correction has provided an attractive buy-the-dip opportunity.

Safe Energy Exposure With Growing Dividend

Enbridge Inc (ENB) is a $75.2 billion pipeline company that moves roughly 30% of the crude oil produced in North America and approximately 20% of natural gas consumed in the United States.

In addition, it’s the third-largest natural gas utility ranked by its number of consumers in North America.

The company was founded in 1949 and it employs more than 12,000 people, with an ambitious goal of achieving net zero emissions by 2050 through its low-carbon energy segment (hydrogen, renewable natural gas, carbon capture & storage).

Over the past decade and a half (2007-2022), Enbridge has grown its revenue from ~$12.0 billion to ~$40.0 billion and nearly doubled its gross margins in the same period (39.0% vs. 24.4%).

The result is that it has increased its annual free cash flow from an outflow of $880 million to positive free cash flow of ~$4.8 billion, and grown cash flow per share from (-) $1.35 to $2.20.

Meanwhile, its annual dividend has increased over 4x from $0.62 to $2.60, making Enbridge one of the highest-yield large-cap stocks in North America.

Although investors might be worried about turbulence in oil/gas producers, it’s important to note that Enbridge is not subject to margin compression like oil/gas producers, given that it is a pipeline company that generates revenue from distribution and it continues to aim toward growing at 5% per year while deploying capital in a disciplined manner.

In fact, 80% of its EBITDA has inflation protections (65% of EBITDA derived from assets with revenue inflators and 15% of EBITDA derived from assets with regulatory mechanisms for recovering rising costs).

In addition, it has its tentacles in nearly every form of energy (including the greener vision for the energy of the future), with plans to grow its liquids exports to 8 million barrels per day (+50%), its LNG exports to 28 Bcf/day (200% growth) and its renewable energy capacity to 1150 GW in North America and Europe, representing ~300% growth from current levels, all based on its 2035 goals.

So, Enbridge is truly the energy company of the future and operates out of safe jurisdictions with predictable rule of law, with 95% of its customers are investment grade.

Hence, Enbridge is about as safe as one can get when it comes to adding energy exposure to one’s portfolio.

The Investment Case

Enbridge has historically traded at more than 22.0x earnings and recently peaked out at a share price of $46.80 last year (albeit lower than its ultimate peak of $53.00) at an earnings multiple of 23.0.

Since its peak, the stock has slid over 20% despite a growing cash flow profile, impacted by weaker sentiment in the energy sector and worries of cost inflation on some new projects.

The good news is that this weakness has left ENB trading at just ~16.6x FY2024 earnings estimates, one of its cheapest valuations since 2020 when the stock went on an impressive run and gained nearly 50% in value ($32.00 – $47.00).

Obviously, there’s no guarantee that ENB will deliver similar returns on a forward 2-year basis this time around, but the time to buy the stock has typically been when it’s dipped close to 16.0x earnings and begin paring back one’s position when it trades at closer to 22.0 – 23.0x earnings in the upper end of its range.

Today, we are clearly at the low end of this range barring a market crash that might send the stock to 14.0x earnings, and ENB’s dividend is even more attractive than in 2020, with investors scooping up ~$2.70 per share annualized based on FY2024 estimates.

So, with steadily growing dividends, disciplined capital allocation and an attractive valuation, this is an opportunity to look at starting to build a position.

The Technical Picture

Many trend followers and momentum traders would shy away from Enbridge and that’s understandable with the stock below its 50-day and 200-day moving averages.

However, Enbridge has found itself at a critical level that’s typically provided support in the past, and this is its 250-week moving average.

See the Full Technical Analysis Report for ENB

This level marked the bottom for the stock in October 2022 and in most other corrections outside of the COVID-19 panic, and I wouldn’t expect this time to be any different, with Enbridge likely to find a floor in the $34.50 – $36.50 region given its stable dividend in a time of elevated market volatility when many investors are looking for safety.

Plus, if sentiment improves in the energy sector, I would expect ENB to catch a bid and rebound above $40.00 given its current oversold position.

The Bottom Line

Based on what I believe to be a fair earnings multiple for Enbridge of 19.9 (10% discount to long-term average of 22.1) and FY2024 annual EPS estimates of $2.24, I see a fair value for Enbridge of $44.55 per share.

Although this might point to just 20% upside from current levels, it’s important to note that investors are picking up a 7.2% forward yield at current prices, pushing total return from current levels to over 27%.

In my view, this is a very attractive return for the cash portion of one’s portfolio that the average investor may prefer to keep out of harm’s way until there’s better confirmation that we’re out of the woods in regards to this violent cyclical bear market that began in January 2022.

So, for investors looking for sleep-well-at-night stock (low beta and consistent income) that also offers exposure to the clean energy sector through its growing renewable energy portfolio, I see Enbridge as a Buy below $36.90.

Disclosure: I am long ENB

The above analysis of Enbridge Inc (ENB) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Is Enbridge Inc (ENB) A Buy or Sell?

Based on MarketClub’s technical analysis tools, Enbridge Inc (ENB) is showing short-term strength. However, look for the longer-term bearish trend to resume. As always, continue to monitor the trend score and set stops.

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