If you are a dividend investor, then Enbridge's (NYSE: ENB) 7.6% dividend yield will probably be very attractive to you. So, too, will be the 29-year streak of annual dividend increases that back that yield. But before you buy this midstream giant, you need to have a better understanding of the actual business. It isn't as clean an energy play as you might want it to be, which might attract some investors while repelling others.
The midstream is a reliable niche
From a big-picture perspective, Enbridge is what you call a midstream company. The upstream is filled with oil and natural gas producers. The downstream is where refiners and chemical companies live. The midstream basically connects the two, helping to move oil and natural gas, and the products into which they get turned, around the world. The infrastructure that is used to do that includes pipelines, storage, and transportation assets, among other things.
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It's costly to build midstream assets, but once they're built, they tend to provide reliable cash flows. The key is that companies like Enbridge are toll-takers, charging fees for the use of the pipelines and other midstream infrastructure they own. The price of the commodities flowing through Enbridge's system is less important than the demand for oil and natural gas. Even when energy prices are weak, demand generally remains quite robust given the importance of these fuels to the global economy.
So if you're looking to maximize the income your portfolio generates, Enbridge is probably a fairly compelling energy stock for you to consider. Although the yield will probably make up the lion's share of your return over time, the company won't be quite as susceptible to the inherent ups and downs of commodity prices as upstream or downstream companies would be.
There's more than oil and gas going on here
That said, if you're looking for an energy stock that's focused on oil and natural gas, well, Enbridge might not work for you. That's because the company has a very specific goal of shifting its portfolio along with the world around it. There are two unique outcomes from this focus.
First, Enbridge happens to own a large natural gas utility in Canada. Although you could, technically, call this a natural gas business, it's really a regulated utility. That means the government has granted Enbridge a monopoly in the regions it serves but that regulators get to approve the company's rate increases and capital-spending plans. Generally, this leads to slow and steady growth, as regulators try to balance the need for a reasonable return against reliable access to energy and low prices for customers. But at the end of the day, a utility business is just fundamentally different from energy businesses.
Enbridge has agreed to buy three more regulated natural gas utilities as well, which will further increase the importance of this business line. For conservative investors, having more regulated assets like this will probably be attractive, since it should lead to even more reliable cash flows. But for investors interested in a pure play energy company, well, it further dilutes the story.
Second, Enbridge has a modest amount of exposure to clean energy assets, including offshore wind farms in Europe. This business only makes up a few percentage points of earnings before interest, taxes, depreciation, and amortization (EBITDA) today, but that's likely to grow over time as the company executes on its long-term goals. Once again, conservative investors will probably appreciate the portfolio diversification. But those seeking a pure play on energy, or even just a midstream investment, will probably find it a difficult selling point.
Enbridge isn't going to please everyone
When you bring it all together, Enbridge has a unique portfolio backed by a unique long-term vision. It isn't trying to be a midstream company, per se. It's trying to serve the world's energy needs as they evolve over time. Along the way, it's working hard to reward investors with a reliable stream of dividend income. That will probably interest more conservative dividend investors, but it probably won't be a great fit for those specifically looking for exposure to oil and natural gas stocks.
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Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool has a disclosure policy.
