In 2020, I left ExxonMobil (NYSE: XOM) and in The total (NYSE: TOT), capture the losses and transform into a European energy giant working for a cleaner future. In March I found another energy name to add to my portfolio but this time it is based in North America and like Total is already working on building an energy company renewable. Here’s why retirees might love Canada Enbridge (NYSE: ENB) as much as me.
The problem with Exxon
I don’t really like Exxon, but it certainly goes against the clean energy zeitgeist. And when the stock fell in 2020, and I had to capture capital losses to offset gains elsewhere in my portfolio, I sold. It was an opportunity to reassess my position on the energy sector.
Exxon’s position, and with which I agree, is that oil and natural gas will be vital to global energy needs for years to come. However, it’s hard to deny that renewable energy is also an increasingly important element. As I did not want to leave the energy sector, I decided to buy out Total, which had drawn up a plan to use its energy activity like a cash cow to gradually increase its “electron” activity.
I still love Total, but I looked into the North American mid-market and tried to find a name that I thought was worth adding to my portfolio. This profitable niche of the larger energy space offers high returns, but growth is likely to be difficult to achieve in the short term due to low oil and natural gas prices (and therefore weak demand for drilling and drilling. new pipelines). And then there is the concern about the broader shift to renewable energy to consider. For months, I did nothing, staring at companies and mastering limited partnerships in space and rolling the options in my head.
And then, just recently, I watched the full three-hour recording of Enbrige’s Investor Day after attending Enbridge’s full year 2020 results conference call. I should probably consider a hobby, since I did, and some more research, on a weekend. But I was sold and the following Monday I bought the stock.
Core and explore
I would be lying if I didn’t mention performance as a major reason for my purchase. Enbridge currently offers a very generous dividend yield of 7.2%. Equally important, however, is that the company has increased the dividend each year for 26 consecutive years, which places it in the Dividend Aristocrat space. This streak, by the way, includes an increase of around 10% in 2020 and an already announced 3% increase for 2021. The company is targeting a distributable cash flow payout ratio of between 60% and 70% and expects to fall within this range. year, the payment therefore seems to be well supported.
The 2020 hike, meanwhile, hits another key fact for me: Enbridge weathered the oil downturn linked to the coronavirus pandemic in relative stride. While earnings were unsurprisingly lower year over year, distributable cash flow fell from $ 4.57 per share in 2019 to $ 4.67 per share in 2020. That was at roughly the midpoint of the company’s forecast for 2020, which had been provided before the pandemic struck. It’s a pretty strong performance in the face of adversity and it gave me material confidence in his ability to hold the dividend thick and thin. Indeed, 2020 was a stress test that many mid-market companies failed to pass.
The real kicker here, however, is what I buy. About half of Enbridge’s business is related to the transportation of oil. It has a well-established position through its main system which is vital to the industry and, even with modest expansion efforts, is a cash cow for the company. About 30% of the company is dedicated to gas pipelines, with a significant presence in the North East where demand is high and supply limited. Natural gas has been and likely will remain a key transition fuel as the utility sector moves away from coal. Another 10% or so is related to a natural gas utility company that follows the same basic trend as natural gas replaces other heating options. And the rest of the portfolio is electricity, with a growing focus on offshore wind in Europe. This offers a direct angle of clean energy that is expected to gain importance over the next several years.
Almost all of Enbridge’s activities are paid for or backed by long-term contracts. The total collection, on the other hand, offers a similar approach to that adopted by Total. Basically, the oil cash cow helps develop businesses that have better long-term prospects, including renewables. This is a story that I found very compelling from a company that has proven it can handle a major industry downturn while still growing. On this front, in the meantime, Enbridge believes it can continue to invest between $ 3 billion and $ 4 billion per year in organic growth projects to drive Distributable Cash Flow growth of 5% to 7% per year at least until ‘in 2023, if not more. Dividend growth is expected to follow a similar range, but slightly lower. My concern about growing in the middle space doesn’t seem to apply here, assuming management is even close to correctness.
After spending a little more time getting to know Enbridge better, I decided this was the middle energy store I was looking for. You might think so too, given its strong business, high and well-sustained dividend yield, and growth prospects, including in renewables. There are issues, such as a high level of leverage (which has been the case for a long time, but has always been well managed) and the fact that dividends are paid in Canadian dollars, so what US investors will actually get will vary with exchange rates. But no stock is perfect and these are imperfections I can live with. Overall, my first energy choice today, for retirees or just about anyone, is easily Enbridge.