Pipeline companies are viewed as stable investments in the energy sector because they are responsible for transporting and storing oil and natural gas and are not as sensitive to commodity prices.
From its 52-week high of $66, Enbridge Inc. (TSX:ENB)(NYSE:ENB) has dipped to $59 in less than two months, a drop of close to 11%, leading to a yield of 3.1%. Is this an opportunity to buy some Enbridge shares today?
Growth
Enbridge has $44 billion of short-term and long-term projects on its belt. This indicates that there’s lots of room to increase earnings and cash flow when its investments start paying off.
Enbridge anticipates continual growth to 2018 and beyond. Specifically, the company forecasts earnings per share (EPS) growth up to 2018 to be 10-12% per year.
Its growth for the rest of the year is expected to come from the increase of liquids throughput, the Mainline tolls, and the $9 billion of new projects that are coming online throughout the year.
Yield and dividend growth
Enbridge’s 3.1% yield is a solid one, although it’d be more attractive at a yield range of 3.3-3.5%. Still, investors wishing to start a position in Enbridge could consider its shares today with expected returns in the teens.
Enbridge has increased dividends for 19 years in a row. In the past it has typically grown dividends at a rate of over 11% per year. So, it might have surprised investors this year when it hiked the dividend by 33%. Where did that spike of growth come from?
A healthy dividend is sustained by a healthy cash flow. Enbridge estimates its cash flow per share to grow 25% per year between 2013 and 2018, which should continue to support the growing dividend. With EPS expected to grow 10-12% each year, the company forecasts dividends to grow at a compounded annual growth rate of 14-16% per year up to 2018, which would be amazing.
Enbridge generally pays out eligible dividends so that Canadian investors are entitled to the enhanced dividend tax credit.
Financial position
Enbridge’s financial position remains strong. It has a S&P credit rating of A-, and its debt-to-capital ratio is 60%. It also has access to $8 billion of untapped credit and cash.
In conclusion
If you’re looking for a growth company that’s willing to share profits with shareholders by growing dividends, Enbridge may be the investment you are looking for.
At about $59 a share, it pays out a yield of 3.1% and that income is expected to grow at least 14% per year until 2018. For an investment in Enbridge today, that implies a total return of 17%, which more than doubles the general market returns of 7%.
