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Stock Analyst Update

Strong Quarter for Undervalued Enbridge

We are maintaining our fair value estimates and wide moat rating for the firm.


Wide-moat Best Idea  Enbridge (ENB) reported its second consecutive strong quarter. The company reported second-quarter adjusted EBITDA of CAD 3.2 billion, or CAD 1.86 per share, compared with CAD 2.6 billion, or CAD 1.58 per share, in the year-ago quarter. Enbridge also reported distributable cash flow of CAD 1.9 billion, or CAD 1.09 per share, compared with CAD 1.3 billion, or CAD 0.81 per share, in the second quarter of 2017. The strong performance was more or less in line with our expectations. The improved results were driven by record volumes and increased tolls on the Mainline system, new projects placed into service, and the acquired Spectra assets.

Enbridge continues to improve its balance sheet, with adjusted leverage levels falling to 5.6 times, in line with our expectations. The company aims to decrease leverage below 5 times by the end of the year, and we fully expect it to do so. The company’s asset sales will aid in improving the balance sheet. Enbridge’s year-to-date asset sales stand at CAD 7.5 billion, with a potential for another CAD 2.5 billion in future dispositions previously identified by the company.

We are maintaining our $49 and CAD 64 fair value estimates and wide moat rating. The stock was up roughly 1.5% on the positive earnings report and over 10% since the news of Minnesota’s approval of the Line 3 replacement project. Despite the recent rally, we still see plenty of upside. We expect Enbridge to easily meet its 10% average annual dividend growth target through 2020 and maintain a healthy distributable cash flow ratio of 1.4 times the forward dividend. We consider Enbridge a rare triple threat, boasting a wide moat, an attractive 5.8% dividend yield, and a cheap valuation. We think the time is right for long-term investors to capitalize on the stock's considerable upside while collecting a steady stream of growing income. 

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Joe Gemino does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.