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Investors always have to consider the trade-offs they are making when they pick one investment over all of the others available to them. Right now the buy decision around Enbridge (NYSE: ENB) isn't quite as strong as it was just 12 months ago. But this reliable dividend payer still has some positives to offer.
Here's why Enbridge is still a buy for the right kind of income investor.
What does Enbridge do?
Canadian-based Enbridge is a North American midstream giant. It owns the pipelines and other energy infrastructure that helps to move oil and natural gas around the world. This tends to be a very reliable business, driven by fees for the use of the company's vital assets. The price of oil and natural gas aren't nearly as important to the company's financial results as the demand for these energy sources, which tends to remain high even when energy prices are low. The midstream business makes up roughly 75% of Enbridge's earnings before interest, taxes, depreciation, and amortization (EBITDA).
Another 22% of EBITDA comes from a collection of regulated natural gas utilities that Enbridge owns. It operates these businesses in both the United States and Canada. Given the regulated nature of these operations, they are also reliable cash-flow generators. Slow and steady growth is the norm here since the company needs to get government approval for capital spending plans and the rates it charges.
The remaining 3% or so of EBITDA is derived from a portfolio of clean energy investments. This is a small portion of the company, but it demonstrates the company's big-picture goal of shifting its business along with the world around it. Given the long-term trend toward cleaner energy sources, this segment seems likely to grow over time. It also provides a hedge of sorts for investors worried about owning a carbon fuel-focused business.
All in, Enbridge has a reasonably attractive business structure. Now add in an investment-grade rated balance sheet, a roughly 6% dividend yield, and three decades worth of annual dividend increases (in Canadian dollars) and you can see why conservative investors would be interested in the stock right now. There's just one problem. The stock has risen roughly 25% in a year and is up around 80% from its March 2020 lows.
Not as attractive as it was, but still relatively attractive
First off, if you are a deep value investor you probably won't find Enbridge all that attractive anymore. But that's not how every investor invests. The business itself is still very attractive and the dividend yield is lofty on an absolute basis. In fact, at 6%, investors are nearly three-quarters of the way to the 10% return that most expect from the broader market. Add in the company's long-term distributable-cash-flow growth target of around 5% a year and you get 10%, or more.