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Canadian energy infrastructure giant Enbridge (NYSE: ENB) has quietly become one of the better dividend stocks in the market. The company has paid a dividend to its investors for more than 64 years and has increased it for the last 23. That puts it just two years shy of becoming a Dividend Aristocrat. And the company plans on joining that elite group: It has already announced plans to raise its payout at a 10% rate through 2020.
Enbridge's dividend is as good as they get. The company pulls in 96% of its cash flow from recurring sources like fee-based contracts, and it only pays out 65% of that money in dividends each year. Despite that rock-solid payout, Enbridge's stock fell more than 7% in the past week as the market took a tumble, which pushed its yield to an alluring 6%. It's a sale I couldn't resist, so I scooped up a few more shares of the pipeline company this week.
I tossed a few more shares of this top dividend stock into my cart this week. Image source: Getty Images.
A sale upon a sale
Enbridge's slide this week followed a lackluster performance in 2017 when shares slumped more than 7%. It's hard to justify this slide since the company is growing at a healthy clip. Through the third quarter of last year, available cash flow from operations (ACFFO), which is a proxy for free cash flow, leaped 37% to nearly 3.9 billion Canadian dollars ($3.1 billion) thanks to the acquisition of U.S. gas pipeline giant Spectra Energy. ACFFO per share went in the opposite direction, falling 16% through the third quarter, but only because the company issued a boatload of new shares to finance the Spectra Energy deal and expansion projects.
Those growth initiatives are expected to begin paying off this year, with the company anticipating that ACFFO per share will increase 15% versus last year (and 5% above 2016's level). Further, ACFFO per share should grow at a 10% annual clip through 2020, backed by CA$22 billion ($17.6 billion) of in-process growth projects. That said, with the stock selling off, the company's valuation has fallen to a dirt cheap level of about 10 times cash flow. That's well below the 12.1 average of pipeline stocks.
Cheap growth
To put Enbridge's valuation disconnect into perspective, let's compare it to two of the market darlings in the pipeline sector: ONEOK (NYSE: OKE) and Magellan Midstream Partners (NYSE: MMP). Both currently fetch premium valuations of around 14 times cash flow. While it's hard to argue that the duo doesn't deserve to trade at a superior price to other pipeline stocks, it's not easy to explain why they are trading more richly than Enbridge. Its financial metrics and growth prospects are just as good, if not better: