In January, I discussed Enbridge (NYSE:ENB) and MPLX (MPLX) as great investment choices for generating life-long passive income. Since then, ENB has reported its Q4 2023 results and provided guidance for 2024.
In this article, I will break down those results and discuss why ENB - with its yield sitting at nearly 8% on a forward basis - is a retiree's dream stock right now.
ENB Stock Q4 Results
ENB's Q4 results were quite solid and enabled the company to make 2024 a highly successful year, with the company beating the midpoint of its 2023 guidance on both EBITDA and DCF per share and run its dividend growth streak to 29 years.
Moreover, in 2024, ENB invested aggressively in growth by announcing $10 billion in new secured projects, poured billions of dollars into acquiring three U.S. gas utilities, announced $3 billion of tuck-in acquisitions, and brought $2 billion of organic growth projects into service.
Overall, adjusted EBITDA grew by 6% year-over-year, which is quite remarkable for a company that is also paying out a hefty dividend.
Last, but not least, the balance sheet is in excellent shape, with its debt-to-EBITDA ratio now at 4.5x once accounting for the financing needed for its announced acquisitions. This is on the low end of its 4.5x to 5.0x target leverage ratio, supporting its stellar BBB+ credit rating.
Why 8%-Yielding ENB Stock Is A Retiree's Dream
This combination of strong growth, stable cash flow profile, attractive current yield, consistent dividend growth, and a fortress balance sheet as highlighted in its Q4 and FY 2023 results make it a retiree's dream stock.
Moving forward, the company expects to generate ~5% growth per year due to its robust organic growth pipeline across its diversified business model along with continued strategic acquisitions. In particular, management plans to prioritize low-capital and utility-like growth with only highly selective tuck-in asset M&A. This will minimize its capital expenditure burdens, freeing up cash flow to be used to keep leverage at or below its target range, while also maximizing capital returns to shareholders via dividends and opportunistic buybacks. Moreover, by focusing on growing its utility-like cash flows, it will be generating increasingly stable cash flows to underpin its dividend.
As the chart below illustrates, it should have no issues with finding places to invest for growth for the foreseeable future given its large growth project pipeline, particularly in its gas transmission and distribution and storage segments:
Moreover, its cash flow profile is already among the most stable in the midstream sector, with utility-like regulated assets contributing the majority of its EBITDA and the vast majority of its counterparties having investment-grade credit ratings. Moreover, over 80% of its EBITDA is inflation-protected. This means that regardless of where inflation heads and where energy prices head, ENB should continue to generate very stable cash flows for shareholders for years to come.
Third, its balance sheet is in very strong shape right now, with its leverage ratio at the low end of its target range, the company enjoying significant liquidity, and its debt maturities very well-laddered (including a large percentage of its debt termed out decades into the future at attractive fixed interest rates).
This all sets up its most important characteristic for retirees: its dividend, which not only looks very safe but is also very attractive. On a forward-looking basis, the yield is 7.8%, way above its 10-year average of 5.76%, and also well above the yield being offered by money markets and treasuries right now. Moreover, that dividend is expected to grow at a 3.1% CAGR through 2028. While not great, it is in line with where inflation is currently running and higher than the Fed's target 2% inflation rate, so retiree spending power should be preserved over the long term. Finally, its DCF coverage ratio was a very conservative - especially given how stable its cash flow profile is and how strong its balance sheet is - 1.54x in 2023. When combined with management's proven track record of prioritizing and prudently managing its dividend and dividend growth (with a sector-best 29 years of consecutive dividend increases), ENB is about as good as it gets for retirees right now.
As a cherry on top, its total return potential looks quite appealing as well. Combining its 3-5% expected growth rate for the foreseeable future with its 7.8% current dividend yield, you get an 11-13% projected total return CAGR. However, when considering that its EV/EBITDA is a mere 10.8x compared to its 10-year average of 13.2x, there is considerable room for valuation multiple expansion, especially if/when interest rates decline from current levels. At the very least, the market is clearly pricing in the current elevated interest rates. As a result, retirees should be able to sleep well at night knowing that - in addition to ENB meeting their income needs - their principal should be pretty well-preserved for their heirs over the long term.
With all of that said, one factor to keep in mind that may be less than ideal for many retirees is that ENB is a Canadian stock. That means that - outside of a retirement account - some of your dividends will likely be withheld by the Canadian government, though you can reclaim it on your tax return. Moreover, ENB declares its dividend in Canadian Dollars, so there is some volatility from quarter to quarter in U.S. Dollar terms.
Investor Takeaway
While its Canadian Dollar dividend exposure and withholding taxes are slight blemishes for retirees, the pros heavily outweigh the cons with ENB, especially at its current valuation and dividend yield. For income-focused retirees, an 8% yield that grows at 3-5% per year for years to come alongside potential valuation multiple expansion, backed by a strong balance sheet, very defensive business model, and a track record of long-term total return outperformance is hard to beat:
While ENB is not our top pick of the moment in its sector, it is definitely a worthy option for income-focused retirees.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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