ENB Valuation Remains Premium Amid Escalating Trade War: Buy the Stock?

Enbridge Inc. ENB is currently considered relatively overvalued, trading at a trailing 12-month enterprise value to EBITDA (EV/EBITDA) of 15.19x. This figure surpasses the broader industry average of 13.63x. It is higher than other major midstream companies, such as Kinder Morgan Inc. KMI and Enterprise Products Partners LP EPD, which are trading at 13.63x and 9.72x EV/EBITDA, respectively.

It seems that investors are willing to pay a premium for the leading midstream energy player despite uncertainty prevailing in the market amid escalating trade wars between the United States and China. However, before offering any investment advice, let's first take a closer look at Enbridge’s fundamentals.

C$29B Key Midstream Projects Secure ENB’s Future Cash Flows 

Enbridge is a leading midstream energy player in North America, operating an extensive crude oil and liquids transportation network spanning 18,085 miles — the world's longest and most complex system. ENB’s gas transportation pipeline network spans 71,308 miles, covering 31 U.S. states, four Canadian provinces and offshore areas in the Gulf of Mexico.

Enbridge’s pipelines transport 20% of the total natural gas consumed in the United States. The company generates stable, fee-based revenues from these midstream assets, as they are booked by shippers on a long-term basis, minimizing commodity price volatility and volume risks.

The midstream energy major will generate incremental cash flows from its C$29 billion backlog of secured capital projects, which include liquids pipelines, gas transmission, gas distribution and storage, and renewables. The maximum in-service date is 2029.

Like ENB, the business models of Kinder Morgan and Enterprise Products are backed by stable fee-based revenues.

Kinder Morgan’s position as a leading midstream service provider is reinforced by a network of pipeline and storage assets that operate under long-term take-or-pay contracts. These contracts ensure that shippers pay for the capacity reserved, whether they utilize it or not, which provides a steady stream of revenues. This structure allows KMI to generate stable earnings, primarily insulated from fluctuations in the volume of natural gas transported, offering significant stability to its bottom line.

Similarly, Enterprise Products benefits from the long-term, fee-based nature of its midstream operations. EPD, a top-tier North American midstream service provider, boasts a vast and diversified asset portfolio, which includes more than 50,000 miles of pipelines and a storage capacity of 300 million barrels. Notably, Enterprise Products is set to generate additional fee-based earnings with $7.6 billion worth of major capital projects either currently in service or under construction. These project backlogs will not only secure stable cash flows but also generate handsome returns for unitholders.

Enbridge’s Strong Commitment to Shareholders

Enbridge prioritizes returning capital to shareholders, as evidenced by 30 consecutive years of dividend growth, earning its status as a dividend aristocrat. Currently, ENB offers a dividend yield of 6.2%, which is higher than the 5.4% of the composite stocks in the industry.

Considering its substantial backlog of midstream growth projects, Enbridge is expected to continue rewarding shareholders with attractive dividend payments. The midstream giant maintains a 60% to 70% dividend payout ratio, ensuring consistent and growing returns for shareholders while balancing reinvestment in future growth. The company plans to return more than $40 billion to shareholders over the next five years, reinforcing its position as a top dividend-paying energy firm. By focusing on self-funded growth and capital recycling, Enbridge aims to expand its infrastructure while keeping debt levels in check, strengthening its long-term financial stability.

What Investors Should Do With ENB?

Notably, Enbridge has met or exceeded its financial guidance for 19 straight years, proving its earnings stability and predictable cash flow. This consistency highlights the company's ability to navigate market fluctuations, regulatory challenges and economic downturns while maintaining profitability.

However, there are some uncertainties surrounding the stock, such as the Calvados offshore wind project in Europe, which is now expected to enter service in 2027, delayed from its original schedule. Also, the escalating trade wars between the United States and China could lead to a slowdown in the economy, thereby hurting energy demand. This, in turn, could affect demand for the midstream infrastructures of ENB. However, this is not going to be a significant risk for the company in the long run.

Amid the prevailing uncertainties in the global business environment, ENB has slipped 2.4% month to date, outperforming the 6.2% decline of the composite stocks belonging to the industry. EPD and KMI have lost 13.2% and 7.2%, respectively, over the same time frame.  

Therefore, although the company’s long-term outlook is strong, investors should wait for the uncertainties to subside and hence should look for a more opportune moment as the stock, carrying a Zacks Rank #3 (Hold), is currently overvalued. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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