Amid interest rate cuts by the Federal Reserve of the United States and solid September employment numbers in the United States, the S&P/TSX Composite Index has increased by over 15% this year. Meanwhile, Enbridge (TSX:ENB), which transports oil and natural gas across North America through a pipeline network, beat the broader equity markets this year with returns of 23.5%. Let's assess whether Enbridge could continue its uptrend next year by looking at its recent performance and growth prospects.
Enbridge's second-quarter performance
Enbridge posted an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $4.3 billion in the June-ending quarter, representing an 8% increase from the previous year's quarter. Solid performance across four segments drove its financials. The Liquids Pipelines and Gas Transmission segments posted 1.1% and 4.7% year-over-year growth, respectively, during the quarter. Meanwhile, the Gas Distribution and Storage and Renewable Power Generation segments posted 54% and 11.4% growth, respectively.
The company overall generated $2.8 billion of cash from its operating activities. Its distributable cash flow of $2.9 billion represents a 3% increase from the previous year's quarter. Further, Enbridge completed the acquisition of Questar Gas Company and Wexpro from Dominion Energy for US$4.3 billion during the quarter. It ended the quarter with a net debt-to-EBITDA ratio of 4.7. Besides, it had $18 billion of liquidity as of June 30. So, the company's financial position looks healthy. Now, let's look at its growth prospects.
Enbridge's growth prospects
Enbridge has continued to expand its utility business by acquiring Public Service Company of North Carolina from Dominion Energy. With this acquisition, the company completed the acquisition of three natural gas utility assets in the United States, which it had announced last year. These acquisitions would also make Enbridge North America's largest natural gas utility company. Besides, these acquisitions would lower its business risks due to the increased contribution from low-risk, regulated businesses.
Further, Enbridge is also continuing with its $24 billion secured capital program, expanding its midstream, utility, and renewable assets. Meanwhile, the company expects to invest around $6–$7 billion of capital this year, putting around $4 billion of projects into service. These growth initiatives could boost its financials in the coming quarters, thus making growth prospects look healthy.
Dividends and valuation
Enbridge operates a highly regulated midstream energy business, with regulated cost-of-service and long-term, take-or-pay contracts generating around 98% of its cash flows. Also, its inflation-indexed adjusted EBITDA shields its financials from rising prices, thus delivering stable and predictable cash flows. Supported by these healthy cash flows, the company has paid dividends for 69 years and increased its dividends for the last 29 years at an annualized rate of 10%. ENB currently pays a quarterly dividend of $0.915/share, translating into a forward yield of 6.7%.
Despite solid buying this year, Enbridge continues to trade at an attractive valuation, with its NTM (next 12 months) price-to-earnings multiple at 18.7.
Investors' takeaway
The central banks of the United States and Canada have slashed their benchmark interest rates and could continue with their monetary easing initiatives. Given Enbridge's capital-intensive business, falling interest rates could lower its interest expenses, thus boosting its financials in the coming quarters. Considering all these factors, I believe investors can buy Enbridge right now and hold onto it next year to reap superior returns.
