Here’s why you could keep this stock safe for a decade
JThere is no doubt that the demand for clean energy is expected to continue to increase in the future. But that doesn’t mean the shift away from carbon fuels will be quick. In fact, it is much more likely that the world will need all the energy sources it currently has plus new ones to meet the demands of a growing global population. It gives Enbridge (NYSE: ENB) plenty of time to milk its cash cow operations while growing its still-small renewable energy portfolio.
A North American Giant
The Canadian company Enbridge has a market capitalization of $84 billion. The company claims to move about 30% of crude oil produced in North America — 58% of earnings before interest, taxes, depreciation, and amortization (EBITDA) — and about 20% of natural gas consumed in the United States (26% of EBITDA). It also operates the third-largest public natural gas service by number of customers (12% of EBITDA). It is thus firmly rooted in the carbon-energy businesses. And with demand for these fuels expected to increase by 18% by 2040, according to the International Energy Agency (IEA), there remains plenty of demand to support these operations.
The key here, however, is that Enbridge is a midstream company, so it transports these fuels for a fee. The natural gas utility, on the other hand, is regulated and a very stable cash generator. So the ups and downs of oil and natural gas, which are volatile commodities, do not play a huge role here.
The best part of the story is that Enbridge currently expects to generate approximately $2 billion in excess liquidity per year for the next few years. This money can be spent on debt reduction, share buybacks (the current preference), acquisitions and internal investments. This excess cash also provides a huge cushion for the generous 6.3% dividend yield on offer here. It should also be noted that the dividend has been increased annually for 27 years. This places Enbridge in the Dividend Aristocrat space. It is not a night flight company.
The remaining 4%
Here’s the interesting thing about Enbridge: it doesn’t rely solely on carbon fuels to secure its future. The remaining 4% of EBITDA not accounted for above comes from clean energy investments. This figure was only 3% about a year ago, which is a small absolute change, but a 33% increase in percentage. More growth is on the way.
Indeed, Enbridge has a number of large offshore wind projects that it will commission in Europe over the next few years. In fact, about 30% of the company’s capital expenditure budget today is earmarked for clean energy investments. Step back and contemplate that number for a second. A company that represents 4% of the company’s EBITDA should get 30% of its capital investment expenditure. Enbridge is therefore clearly committed to using its cash cow carbon operations to change for the future.
A name for today and tomorrow
If you look at the energy sector, you have to find a balance between the needs of today and those of tomorrow. Enbridge is doing just that, providing the carbon fuels the world still needs and building a clean energy business funded by carbon operations. And with a large excess cash flow, there’s little risk that the big dividend will be cut along the way. It feels like a store of energy that you can comfortably hold for a long time.
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Reuben Gregg Brewer holds positions at Enbridge. The Motley Fool fills positions and recommends Enbridge. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.