Is Enbridge’s high-yielding stock still a buy?

Enbridge (ENB 1.57%) is an $85 billion midstream giant with a business spanning North America. Its dividend yield is 6.7%, which is multiples of the 1.2% yield you would collect from S&P 500 index and the 3.1% offered from the average energy stock, using Energy Select Sector SPDR ETF (XLE 0.37%) as a proxy of the industry.

The only problem is that Enbridge stock has risen sharply over the past six months. Is this high yielding stock still worth buying?

What does Enbridge do?

From a basic perspective, Enbridge is built from the ground up to be boring. The core of its business (about 75% of EBITDA, or earnings before interest, taxes, depreciation and amortization) comprises oil and natural gas energy infrastructure such as pipelines.

Energy companies pay fees to Enbridge for the use of these vital transmission assets, which provides the company with very reliable cash flows. The demand for energy is much more important to the volume of its pipelines than the price of the products moved through the system.

The rest of the business is a mix of regulated natural gas utilities (22% of EBITDA) and renewable energy. Regulated utilities are granted monopolies in their regions in exchange for granting government oversight of rates and capital spending plans. Like pipelines, this business is by regulatory decree intended to be boring and reliable. Meanwhile, the company’s renewable energy portfolio is driven by contracts, so it too generates consistent cash flows.

There are two takeaways here. First, Enbridge’s business is intentionally spread from oil, a dirtier energy source, to solar and wind, clean energy sources. A primary goal is to provide the world with the power it needs, which increasingly means moving to cleaner energy sources. That change will continue.

Second, everything the company does is designed to create reliable cash flows. That’s what has underpinned Enbridge’s 29-year streak of annual dividend growth and its high dividend yield of 6.7%.

A good run for Enbridge

However, the dividend yield was over 7% not too long ago. That’s because investors have pushed Enbridge shares much higher over the past six months, with the stock’s roughly 15% gain easily outpacing the energy stock’s average 5% gain.

ENB data by YCharts.

Expectations of lower interest rates are likely part of the reason for the gain, given that the midstream sector tends to be heavily leveraged. Within the sector, Enbrige tends to use more leverage than its peers due to its exposure to regulated utility assets. Thus, lower rates are likely to be particularly beneficial to Enbridge’s business.

But Enbridge was also in the process of buying three regulated natural gas utilities from Dominion Energy (D 0.81%) in recent months. It is almost done with the last of the three deals, so the uncertainty surrounding the financing of the deal is less of a concern than it was. In addition, the three utilities will bolster Enbridge’s growth plans with highly regulated investments. Such investments tend to occur regardless of the market environment.

ENB data by YCharts.

Overall, the price increase is likely a justified reflection of Enbridge’s improving outlook. But does the price of the advance have the full value here? Not if you’re a long-term dividend investor. The high yield here will probably account for most of your yield, but that’s by design.

Boosting that will be dividend growth, which should probably be in the low to mid-range numbers over time. But add about 3% (roughly keeping the dividend in line with rising inflation) to the 6.6% and you get 9.6%, close to the 10% return expected by most from the broader market. Increasing dividends above that figure only makes the story better.

Not as attractive, but still attractive

Enbridge is not as much of a business as it was a few months ago. This is just a simple fact given the remarkable increase in the share price. But it remains an attractive income stock all the same, thanks to its still high yield, reliable cash flows and improving fundamentals. That, and the fact that the stock is still trading about 15% below its 2022 high. Indeed, there could even be further recovery potential here before the rally fully plays out.