Strong Quarter for Undervalued Enbridge

Wide-moat Best Idea

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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