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Derek Johnson, Supervisor/operator for Enbridge loads pipe at a storage facility just west of Morden, Man., on Aug. 16, 2018.

JOHN WOODS/The Canadian Press

Enbridge Inc.’s high dividend yield has been flashing red throughout most of 2020, beckoning dividend investors but also signalling discomfort with the company’s connection to a depressed energy sector.

The stock’s rebound over the past month suggests that investors are at last warming up to the stock, and there are several reasons why the rally could continue.

Enbridge is an energy infrastructure company best known as a pipeline operator, moving crude oil and natural gas through an extensive network that spans North America. (Full disclosure: I own shares in Enbridge.)

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Depressed oil prices and concerns about the financial health of energy producers – the ones that pay for pipeline space – have weighed heavily on the stock during the pandemic. It didn’t help that the company also faced continuing legal challenges to its Line 3 project, which is designed to replace part of its U.S. crude oil pipeline that moves crude from Alberta to U.S. Midwest refiners.

The share price sank 40 per cent between February and March, sending the dividend yield to a remarkable high of 9.5 per cent, even as bond yields sank.

What’s equally remarkable is that the share price in early November wasn’t much above its March low, as two promising rallies in the spring and summer fizzled out.

Welcome to the third attempt to break out of this funk: The share price has gained about 20 per cent since Nov. 6. This time, though, the dividend yield (now around 7.6 per cent) is looking more like an opportunity than a warning sign – and analysts are bullish on the stock.

Enbridge is operating with an improving backdrop. West Texas Intermediate oil, a U.S. benchmark, has gained 28 per cent since the end of October, to more than US$46 a barrel, which is its highest level in nine months.

Though still well off its recent high of about US$60 a barrel at the end of 2019, the oil price has eased concerns about the energy sector as the economy picks up. Even the share prices of volatile drillers are rallying in anticipation of better years ahead.

What’s more, analysts are upbeat that Enbridge’s Line 3 project – which promises to double its pipeline capacity and brighten the company’s growth profile – is moving in the right direction after years of delays.

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“We view the construction and completion of the US$2.9-billion-plus Line 3 project as a catalyst for Enbridge’s shares,” Robert Hope, an analyst at Scotia Capital, said in a note last week.

He expects that the project will be completed, and operating, in the third quarter of 2021, after Enbridge received its final U.S. federal permit earlier this month and began positioning crews to start construction before year-end. Successful completion of the project could lift the stock’s valuation, meaning that investors will be willing to pay more for things like profits and cash flows.

But even without good news on oil prices and pipeline construction, Enbridge has demonstrated during these dark days that its business model can withstand some pretty nasty shocks.

The company’s EBITDA (or earnings before interest, taxes, depreciation and amortization) from its liquids pipelines declined just 7.5 per cent in the first nine months of the year from the same nine-month period last year. And overall, company generated slightly more cash this year.

As a result, Enbridge maintained its dividend at 81 cents a share over the past four quarters, and announced a modest dividend hike of 3 per cent last week, underscoring management’s confidence in the year ahead: They expect to generate EBITDA between $13.9-billion and $14.3-billion, or as much as $1-billion more than 2019, when times were good.

While the payout hike fails to meet a company target of raising the dividend annually by 5 to 7 per cent, Raymond James analyst Chris Cox said in a note that the increase strikes the “right balance of reaffirming a commitment to long-term dividend growth while acknowledging that higher dividends are not being rewarded [by the market] with the current yield.”

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Analysts expect that Enbridge’s share price will rise about 21 per cent to $51.50 within 12 months, based on the average price target from 10 analysts, which would lower the dividend yield to 6.5 per cent. At current levels around $43, the stock may be a worthy gamble.

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