Importantly, management has reaffirmed Enbridge’s DCF per share guidance for 2020 of $ 4.50 to $ 4.80. The midpoint of $ 4.65 suggests its payout ratio for 2020 would be around 70%.
Therefore, the high yield of the dividend-paying stock should remain intact. Despite the pop of over 2% at the time of writing, Enbridge shares still offer a juicy return of almost 7.5%. Additionally, the stock remains undervalued with the 12-month average analyst price target at $ 51.60.
Therefore, it’s always a great buy for investors – no matter if you are looking for income or price appreciation. The price target suggests upside potential of nearly 19% in the short term.
Dividend Stock is in a Strong Financial Position in the Face of Headwinds
Over the past three years, Enbridge has improved the resilience of its business, which established its strong position before the COVID-19 pandemic hit North America, where it operates.
In essence, Enbridge simultaneously diversified and simplified its business. It positioned itself to have a greater share of its activities in gas infrastructure, but sold its gas collection and processing activities. The first generates more stable cash flow.
In addition, it has made efforts to reduce its leverage and costs. To further build resilience, Enbridge has taken steps to reduce costs a further $ 300 million this year.
Enbridge’s premier brand has enabled it to raise $ 6.9 billion at attractive rates in the debt market. This funding brings its available liquidity to $ 14 billion. He therefore does not need to access the financial markets again before 2022.
That said, management has warned that second half 2020 results will be weaker than first half due to multiple headwinds, including “the pace and magnitude of the recovery in mainline throughput, catching up in spending forecast, lower revenues on the Texas Eastern network due to temporary operating capacity restrictions and lower contribution from energy services. ”
These headwinds will be partially offset by a strong US dollar, low interest rates and cost reductions.
The insane takeaway
With a stable 10-year growth outlook for global energy, including oil and gas, the ENB stock is positioned to rise over time. Dividend stock is a suitable investment for most investors. It offers both good income (a yield of 7.5%) and the potential for stable price appreciation, especially since the stock is currently undervalued.
It should also increase its dividend, a culture it has perpetuated for 24 consecutive years. Its five-year dividend growth rate is 16%, but investors should expect a much more modest dividend growth rate going forward. Even so, its total return potential would still outperform.
The company’s DCF per share forecast this year represents an increase of around 2% from 2019, which should ensure the security of its dividend. By 2022, Enbridge forecasts DCF per share growth of 5-7%, driven by organic growth and its guaranteed capital program. As a result, he should be able to increase his dividend by around 6% per year until 2022.
This would imply total returns of around 13% per year, excluding any expansion of the assessment. This compares favorably to the average return in the Canadian market of around 7%.
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Fool contributor Kay Ng owns shares of Enbridge. The Motley Fool owns shares and recommends Enbridge.