Enbridge (ENB) has an exceptional history of paying dividends. The Canadian pipeline and utility giant has increased its payout for 28 straight years. Fueling that steady growth is Enbridge’s ability to expand its network of income-producing energy infrastructure assets.

The company remains an excellent option for income-seeking investors. That was clear again this quarter as it produced steady results and continued making progress in securing new sources of earnings growth.

Rock-solid financials
Enbridge generated 2.8 billion Canadian dollars ($2.1 billion) of distributable cash flow during the second quarter, a 1% increase from the prior-year period. That kept the company on track to achieve its full-year guidance, which would see cash flow rise by as much as 4% this year. The company is doing an admirable job navigating a few headwinds this year, including higher interest rates and lower commodity prices.

The company continues to produce plenty of cash to cover its dividend, which currently yields 7.3%. This year, its dividend payout ratio should be between 63% and 68%.

That aligns with its long-term target of keeping its payout ratio between 60% and 70% of its distributable cash flow. That enables Enbridge to retain a significant amount of cash, which it uses to fund expansion projects while maintaining a strong balance sheet.

Enbridge expects its leverage ratio will be in the lower half of its 4.5x-5x target range this year. That provides additional financial flexibility to fund its growth while increasing its dividend.

The fuel to continue growing
While Enbridge is facing some growth headwinds this year, it expects them to fade. Meanwhile, the company continues to secure new opportunities to drive future growth.

It locked up a few more expansion projects during the second quarter. NextDecade made a final investment decision to start constructing its Rio Grande LNG facility in July. Because of that, Enbridge expects to start construction on the Rio Bravo pipeline to support that facility once it receives regulatory approval. It anticipates investing about $1.2 billion into the project, which should come online in 2026.

That project was part of CA$1.8 billion ($1.3 billion) of expansions added to the company’s backlog during the quarter. It also added $200 million to its gas transmission modernization program. These additions increased the company’s secured growth capital backlog to CA$19 billion ($14.2 billion).

It expects to finish CA$3 billion ($2.2 billion) of projects this year and next, with the remaining coming online through 2028. Meanwhile, it has several more expansion projects in the pipeline, including more than 4.5 gigawatts of onshore renewable energy projects under development.

These expansion projects support Enbridge’s outlook that it will grow its distributable cash flow per share by around 3% annually through 2025, and then by roughly 5% annually after that. This rising cash flow should support dividend growth at a similar pace.

The company has ample financial flexibility to fund its continued expansion while growing the dividend. It projects to have about CA$6 billion ($4.5 billion) per year of funding capacity when adding its post-dividend free cash flow to its balance sheet capacity.

In addition to financing organic growth projects, Enbridge can also make opportunistic acquisitions to enhance earnings. It has spent about CA$1.1 billion ($820 million) this year to acquire a couple of natural gas storage assets and an additional interest in an oil pipeline.

Steady as it goes
Enbridge continues to generate very durable cash flow, which has been on full display this year. That’s giving it the money to pay an attractive dividend while investing in its continued expansion.

It has a lengthy pipeline of projects underway and plenty of funding capacity. Because of that, Enbridge should be able to continue increasing its dividend. That makes it an excellent stock for income-seeking investors to buy and hold long term.

— Matthew DiLallo

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Source: The Motley Fool