Enbridge(NYSE: ENB) has been an exceptional investment over the decades. The Canadian pipeline and utility operator has delivered more than an 11% compound annual total return over the past 20 years. That has outpaced the S&P 500 and its nearly 10% annualized total return, and its peers in the utilities and midstream sectors, with about 8% average annual total returns.
The energy infrastructure company could produce even higher total returns in the coming years. One factor fueling that view is its ability to capture a "once-in-a-generation" acquisition opportunity that it will close in phases this year. That deal will enhance its operations and growth profile, giving it more fuel to increase its 7.5%-yielding dividend.
Snaring a once-in-a-generation opportunity
Last September, Enbridge agreed to buy three natural gas utilities from Dominion for $14 billion. The transaction will create North America's largest natural gas utility platform with 7 million customers. It's paying a very reasonable price for the utilities at about 1.3 times their enterprise value-to-rate base and 16.5 times price-to-earnings.
"Adding natural gas utilities of this scale and quality, at a historically attractive multiple, is a once-in-a-generation opportunity," stated CEO Greg Ebel in the press release unveiling the transaction. He further noted that Enbridge expects the deal to be accretive to its distributable cash flow per share in the first year of full ownership, which should increase over time, powered by their strong growth profiles.
Enbridge recently closed the purchase of The East Ohio Gas Company, the first of its three gas utility acquisitions from Dominion. "The addition of a strong Ohio-based gas utility company is a great strategic fit for Enbridge. It further diversifies our business and enhances the stable cash flow profile of our assets," stated Michele Harradence, the president of gas distribution and storage at Enbridge. Harradence further noted: "Natural gas utilities have long useful lives and are 'must-have' infrastructure for providing safe, reliable, and affordable energy. This gas utility will help blend and extend our cash flow growth outlook through the end of the decade by adding a steady, regulated investment that supports our long-term dividend profile."
The fuel to grow shareholder value
Enbridge expects to close the other two gas utility acquisitions from Dominion later this year. Once it does, the company will get 22% of its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) from the very stable gas utility sector. That will further diversify its business mix while reducing the earnings contribution of its liquids pipelines segment to 50% of the total, with the rest coming from gas transmission (25%) and renewable power (3%).
The shift toward lower carbon energy will pay dividends over the long term. It should provide Enbridge with additional growth opportunities.
That has already been the case this year. The company recently formed a natural gas pipeline and storage joint venture connecting the Permian Basin to the U.S. Gulf Coast region. That deal will further diversify its cash flow and provide a near-term boost with future growth upside.
These investments have helped enhance Enbridge's long-term growth visibility. The company expects to grow its adjusted EBITDA by 7% to 9% annually through 2026, with its distributable cash flow rising by around a 3%-per-share pace, slowed in the near term by tax changes and a higher share count to pay for the Dominion transactions. Meanwhile, fading headwinds should help drive accelerated cash flow per share growth of 5% annually after 2026, with adjusted EBITDA likely to rise at a similar pace.
Add Enbridge's already high 7.5% dividend yield to its growing cash flow per share of 3% to 5% annually over the long term, and the company should produce total annual returns in the 10%-12% range. That's a very strong return from such a low-risk dividend stock.
An incredible investment opportunity
Enbridge is capitalizing on a once-in-a-generation opportunity to acquire three high-quality gas utilities. Those deals will significantly enhance the sustainability of its cash flows and its growth profile. Add in its other growth drivers, and Enbridge should have the fuel to produce strong total returns over the long term. That makes it a great stock to buy and hold for the long haul this month, especially for those seeking an attractive and growing income stream.
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Matt DiLallo has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
