Enbridge(NYSE: ENB) has been a superior performer over the years. The Canadian energy infrastructure giant has handily beaten the S&P 500 over the long term. Fueling its success is its cash-gushing business model, which gives it the money to pay a very generous and growing dividend.
The company should have plenty of fuel to continue growing its payout in the future. That makes it a great dividend stock for those seeking market-beating total return potential.
A history of enriching investors
Enbridge is a proven value creator. It has consistently grown its earnings and dividends, which has helped power market-crushing total returns:
Image source: Enbridge.
As that graphic showcases, Enbridge has delivered an 11.4% average annual total shareholder return over the last 15 years. That has significantly outpaced the S&P 500's 8.9% average annual total return.
Enbridge's ability to allocate its abundant cash flow to grow its earnings and dividend is a big driver of its outsized returns. The pipeline and utility company produces very stable cash flow, with 98% backed by predictable cost-of-service arrangements and long-term contracts. It typically pays out 60%-70% of its steady cash flow in dividends. It uses the remaining funds and its balance sheet capacity to expand its durable pipeline and utility businesses to grow its cash flow.
This low-risk business model has enabled Enbridge to steadily increase its dividend. The midstream giant recently announced its 29th consecutive annual dividend increase.
The fuel to continue rising
Enbridge currently generates 12 billion Canadian dollars ($9 billion) of cash flow each year. It expects to pay CA$7 billion ($5.2 billion) in dividends in 2024 at its recently increased rate. That leaves it with CA$5 billion ($3.7 billion) in excess free cash flow to allocate toward growing shareholder value. The company needs to reinvest CA$1 billion ($750 million) to maintain its legacy assets. Meanwhile, it has already lined up CA$5 billion ($3.7 billion) of expansion projects to fund in 2024. Enbridge has the balance sheet capacity to fund the remaining capital and roll over maturing debt.
That forecast doesn't include any impact from the company's pending acquisitions of three natural gas utilities from Dominion. Enbridge is paying $14 billion, which it's funding with its strong balance sheet, new stock, and asset sales. That deal will grow the company's stable cash flows over the next few years as it benefits from its incremental income and CA$1.7 billion ($1.3 billion) of planned annual expansion-related investments across those utilities over the next three years.
Those expansion projects will enhance Enbridge's already sizable capital project backlog. The company will have CA$24 billion ($17.9 billion) of commercially secured expansion projects that should come online through 2028. Future projects include offshore wind farms in Europe, natural gas pipeline expansions in North America, and a Canadian liquified natural gas export facility.
The company's secured capital project backlog and rising rates across its legacy assets support a solid base earnings growth rate of 2% to 4% annually over the next few years. On top of that, Enbridge has the investment capacity to add another 2% to its bottom line each year as it secures additional expansion projects and makes acquisitions. It has already made several acquisitions over the past year, including its pending acquisition of three gas utilities from Dominion. That drives Enbridge's view it can deliver 5% annual earnings growth over the medium term. The company's steadily rising earnings should give it the fuel to continue increasing its already attractive dividend (currently yielding 7.6%).
The fuel to produce strong total returns
Enbridge's massive cash flows give it the money to pay a very attractive dividend. That 7.6% yielding payout provides investors with a nice base return. Meanwhile, the company still retains plenty of cash to fund a healthy growth rate that should average around 5% annually over the medium term. Add it up, and Enbridge could produce average annual total returns in the double digits, putting it in a strong position to continue outperforming the S&P 500.
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Matthew 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.
