The ongoing debate between what’s best between high yield & low growth and low-yield & high growth is a question investors frequently need to ask themselves. Should one solely focus on getting a solid stream of income, but the again giving up potential future growth returns? And what happens if the company cuts the dividend? What’s the value of the holding then? Arguably, the best asset for most investors is a combination of yield above inflation, but also a security with promising outlook. Enbridge can give you just that!
Founded all the way back in 1949, Enbridge Inc (USA) (NYSE:ENB) has shown strong historical performance for decades paying interrupted dividends for 23 years in a row. The Canadian multinational energy transportation company operates within three segment – Oil & Gas Production & Pipeline.
Why Enbridge might be a strong buy right now:
If we first take a look at the consensus, the mean consensus is outperform. Enbridge has 16 analysts following the company. The lowest target price is $37.5 (48 CAD) providing a 17% positive spread. The mean consensus is about $49 (56.5 CAD) providing a 37% positive spread and the highest target price is about $50 (64 CAD) providing a 56% positive spread. Already here investors should pay attention, because it’s not common to find stocks that are followed by more than 15 analysis while providing a 17% positive spread to the lowest target price. In other words, the margin of safety is quite high already.
Further, Enbridge’s yield is hovering at 6.52%, which is 4% higher than what the Vanguard FTSE Canada All Cap Index ETF (NYSE:VNC) can deliver. Enbridge’s high yield should be very attractive for income seeking investors who want to get a solid paycheck each month. Keep in mind that Enbridge has paid interrupted dividends for 23 years in a row. But it doesn’t stop here.
The dividend growth is also quite astonishing. The 1-year dividend growth is 13.8%, the 3-year dividend growth is 19.9% and the 10-year dividend growth is 11.7%. Management has said that they seek to at least show double digit dividend growth throughout 2022. If we use a 10% CAGR for the next 5 years, the yield will be 7.17% in 2019, 7.89% in 2020, 8.68 in 2021 and 9.55% in 2022.
Cleary, Enbridge shows great strength in both dividend income and dividend growth, but a fundamental question investors should ask themselves is how recession resistant is the stock. How did the company perform during the last financial crisis? From 2007 – 2009, Enbridge’s earnings-per-share fell -20.6% during the financial crisis. But the company returned -23% while the s&P500 dropped -55%, which means that the company might be seen as a somewhat defensive investment.
The last question to ask is if the payout ratio is above what we normally aim for, which is 70% or less. Enbridge’s payout ratio has normally been around 60 to 70%, but in went above 90% in 2017. However, the payout ratio for 2018 is anticipated to be 84% which is high, but nothing scary since 95% of Enbridge’s income is fixed. In total, Enbridge looks like a rather special security trading at a great value in a rather expensive market.
The author owns stocks in Enbridge