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Strong Quarter for Undervalued Enbridge

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

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Enbridge Inc

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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About the Author

Joe Gemino

Senior Equity Analyst
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Joe Gemino, CPA, is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.. He covers Canadian oil and gas companies.

Before joining Morningstar in 2015, Gemino held equity analyst roles for Goldman Sachs and Gate City Capital Management. Before business school, he was a technical accountant for Citigroup and Northern Trust.

Gemino holds a bachelor’s degree and a master’s degree in accountancy from the University of Notre Dame along with a master’s degree in business administration from the University of Chicago Booth School of Business. He holds the Certified Public Accountant designation.

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