What a difference a year makes. Last year was a disappointing one for Enbridge (NYSE: ENB) as its stock tumbled 20% due to worries about its debt, which had increased to an uncomfortable level as a result of the company's expansion efforts. The pipeline company would go on to address that problem by selling several assets and fixing another concern by acquiring all of its publicly traded subsidiaries, in a move that will reduce complexity and costs while allowing it to retain more of its prodigious cash flows, but shares remained under pressure in 2018.
This year, however, Enbridge's stock has been on fire, soaring nearly 20% due in part to a big rebound in the oil market. That rally likely has investors wondering if Enbridge is still worth buying.
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A closer look at the valuation
Shares of Enbridge currently trade right around $37 apiece after the company's big run-up this year. Because of that, they aren't as absurdly cheap as they were a few months ago when the stock was selling for less than 10 times cash flow. However, with Enbridge on track to generate $3.34 per share in cash flow this year at the midpoint of its guidance range, it implies that shares sell for about 11 times cash flow. That's still relatively cheap considering that Enbridge has historically traded at a mid-teens multiple of cash flow, which is where we find some of its peers these days.
Several analysts who cover the company also agree that shares still appear to be attractively priced. Quite a few put out bullish reports on the stock in late January -- after its big run-up to start the year -- setting price targets that are still about 10% higher than the current level on average.
Lots of growth up ahead
Aside from valuation, one reason why several analysts are bullish on the company's stock is its growth prospects. Enbridge grew its cash flow per share by 20% last year due to record operating performance, thanks in part to recently completed expansion projects. While the company expects meager earnings growth this year due to the timing of when expansions will enter service, it sees growth reaccelerating in 2020, with it anticipating a 12% increase in cash flow per share. That works out to a 10% compound annual growth rate in cash flow per share over those three years, which is impressive considering that Enbridge is the largest energy infrastructure company in North America.
Enbridge also recently secured several new expansion projects, which should support continued growth beyond 2020. In the company's estimation, it has the financial capacity to fund the expansion projects necessary to grow its cash flow per share by a 5% to 7% annual rate after next year. The company could accelerate that pace if it sold assets or stock and invested the proceeds into additional high-return expansions initiatives such as organic growth projects or acquisitions.
Let's not forget the dividend
Another of Enbridge's attractive qualities is its dividend, which currently yields a well above-average 6%. That payout is on rock-solid ground since Enbridge pays out a conservative 65% of its cash flow in support of that juicy dividend and has a much-improved balance sheet following its financial maneuvers last year.
As a result, the company remains confident that it can increase its payout by another 10% next year. In the meantime, the company should be able to continue increasing its dividend along with earnings post-2020, implying that it could expand it at a 5% to 7% annual pace, which is a healthy growth rate for such a high yield.
Verdict: Enbridge is still a good buy
While Enbridge isn't the screaming bargain it was to start the year, it still has the potential to generate market-beating returns over the long term. Not only is its stock still relatively cheap, but the company expects to grow both cash flow and its high-yielding dividend at a healthy rate going forward. Even if shares don't fetch a higher valuation multiple, the combination of Enbridge's 6% dividend yield and a low-end cash flow growth rate of 5% per year suggests that the company could produce 11% average annual total returns from here, which should beat the market over the long haul.
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