Enbridge (ENB) is a leading pipeline company that has a vast asset footprint across the US and in Canada. The Calgary-based company is a member of the TSX 60.

Company Overview           

Enbridge, which was founded in 1949, owns a network of natural gas and oil pipelines primarily in Canada, but to some extent in the US as well. The company generates the majority of its revenues from fee-based contracts, which means that revenues are not dependent on commodity prices. In recent years Enbridge has sold off several non-core assets to focus on its pipeline business. At the same time, the company has acquired a majority stake in Spectra Energy.

During the second quarter, Enbridge generated net earnings of $0.50 per share, an increase of 58% year over year. Income investors should focus on distributable cash flows, though, which are at a higher level than profits. Enbridge forecasts distributable cash flows of $3.40 per share for the current fiscal year.

Growth Prospects       

Enbridge is not active in a high-growth industry per se, but the company will still see a substantial increase in its profits and cash flows over the coming years.

This is due to two factors: Corporate simplification and organic growth projects. Enbridge invests heavily into new pipeline projects such as the Line 3 Replacement, which connects Canadian oil sands regions to markets in the US. Enbridge plans to invest $18 billion into new projects over the coming three years. Once these projects are running, they will produce a significant amount of additional cash flows.

Enbridge also plans to change its corporate structure. It currently holds stakes in several other companies, such as Spectra Energy LP and Enbridge Energy Partners LP. Enbridge plans to buy out the remaining shareholders to become the sole owner of these companies. This will allow Enbridge to retain a higher portion of cash flows, and since these takeovers will be done at low valuations, the deals should be highly accretive.

Valuation, Dividends, And Expected Returns

Based on Enbridge’s forecast for distributable cash flows of $3.40 during 2018, shares are trading at just above 10 times this year’s distributable cash flows (operating cash flows minus maintenance capex). That is not a high valuation, and we feel that shares have some upside potential towards a fair value of 11 times distributable cash flows.

Enbridge pays a dividend that yields 5.8% right here. The company plans to raise its dividend by ~10% in 2019 as well as in 2020. The combination of a high current yield and a compelling dividend growth rate makes Enbridge attractive for income-focused investors. The dividend payout ratio, relative to distributable cash flows, is not overly high, at 60%. This means that Enbridge’s dividend looks sufficiently safe right here.

Through a combination of its high dividend yield, a ~1% tailwind from multiple expansion, and a cash flow growth rate of ~7% annually, Enbridge could deliver total returns of ~14% a year through 2023. This makes Enbridge look like a highly attractive stock at the current valuation.

Final Thoughts

Enbridge is in the midst of two major transformative moves: The company has been selling non-core assets while investing heavily into new pipelines, and Enbridge will also simplify the corporate structure by buying out the LPs.

Enbridge should be able to generate meaningful cash flow and dividend growth during coming years. Coupled with a low valuation and a high current dividend yield, Enbridge looks attractive for income investors as well as for those seeking total returns.