Enterprise Products Partners (EPD) and Enbridge (ENB) have proven to be reliable investment options for investors seeking stability and growth in the energy sector. Enterprise and Enbridge have attractive dividend yields of 7.5% and 7.4%, respectively. In comparison, the average yield in the energy sector is 3.5%.
Furthermore, both are also Dividend Aristocrats - that is, S&P 500 Index ($SPX) companies that have increased their dividends for more than 25 years. Let’s find out if these high-yielding Dividend Aristocrats are a good buy now.
The Case For Enterprise Products Partners
Earning the title of Dividend Aristocrat reflects the stability of EPD’s business fundamentals. EPD operates across a diversified portfolio that includes natural gas processing plants, pipelines, storage facilities, and export terminals. This diversity allows it to generate a steady income stream regardless of fluctuations in commodity prices. As a midstream company, EPD doesn’t rely on the volatile pricing of oil and gas; instead, it profits from the volume of products transported through its infrastructure.
For context, EPD revenue has increased from $36.5 billion in 2018 to $58.1 billion in 2022. Its earnings per share have risen from $1.91 to $2.50 over the same period.
So far in 2023, EPD shares have gained 8.5%, compared to the S&P 500’s 23% gain.
EPD has maintained healthy cash flows, allowing it to raise dividends consistently. In the third quarter, its distributable cash flow (DCF) came in at $1.9 billion, in line with the year-ago quarter. It also generated an adjusted free cash flow of $1.2 billion in Q3. Free cash flow on hand should help the company reduce its debt burden, as its debt-to-equity ratio is quite high at 1.07.
This consistent growth in cash flows allowed the company to increase the quarterly dividend by 5.3% to $0.50 per share in the third quarter. This latest increase also marked EPD’s 25th consecutive year of dividend growth.
EPD has a dividend payout ratio of 75%, implying that there is more room for dividend growth. Analysts predict that EPD's revenue and earnings will increase by 5% and 6%, respectively, in 2024.
Overall, Wall Street considers EPD stock to be a "strong buy." Eleven of the 13 analysts who cover EPD recommend a "strong buy," and two recommend a "hold." The average price target of $31.57 set by analysts represents a potential 20% gain from current levels.
The Case For Enbridge
Like Enterprise, Enbridge also boasts an extensive and diversified portfolio of energy assets, including pipelines, natural gas utilities, storage facilities, and renewable energy projects across North America. Its diversified asset base also protects it from commodity price fluctuations, as the company predominantly earns fees for transporting energy products rather than being directly exposed to price volatility.
Its latest third-quarter results were robust, with adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) jumping 3.0% year-over-year to $3.8 billion, while DCF also increased by 3% to $2.5 billion.
Management also reaffirmed full-year guidance, predicting adjusted EBITDA of $15.9 billion to $16.5 billion with DCF per share to land between $5.25 to $5.65. While Enbridge expects to end the year strong, its shares have taken a hit, falling 9.4% year-to-date.
Looking ahead, Enbridge expects 2024 EBITDA to increase by more than 4%, with 3% growth in DCF.
Enbridge has a history of strategic capital investments aimed at expanding and modernizing its infrastructure. Recently, the company announced the acquisition of three U.S.-based gas utilities companies from Dominion Energy (D) for an aggregate purchase price of $14 billion. While this acquisition will benefit its cash flow and earnings, boosting dividends in the long run, it is also pressurizing its balance sheet.
Enbridge recently announced a 3.1% quarterly dividend hike to $0.915 per share, marking its 29th annual dividend increase. While Enbridge's yield is attractive, its dividend payout ratio of 122% worries me, because a high payout ratio is difficult to sustain over time. Its debt-to-equity ratio is also high, at 1.19. This indicates that the company has been heavily dependent on debt. However, the company's diverse business and strategic acquisitions ensure a consistent revenue stream, which could help it pay down debt.
Overall, Wall Street rates Enbridge stock as a "moderate buy," with five analysts recommending a "strong buy" and three recommending a "moderate buy." Furthermore, six analysts rate it a "hold," while two rate it a "strong sell." The average analyst target price of $40.71 represents an upside potential of 15% by the end of 2024.
The Takeaway
If you are a growth-oriented investor, these energy stocks might not be the right fit for your portfolio. However, Enterprise and Enbridge's commitment to dividend growth, coupled with their relatively high dividend yields, should appeal to income-oriented investors looking to earn consistent passive income for years. As Dividend Aristocrats, both companies have demonstrated their dedication to providing shareholders with a steady income stream. Enterprise and Enbridge are down 5.9% and 15.9% from their 52-week highs, respectively, making now an excellent time to buy on the dip.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
