Enbridge Inc. ENB is currently considered relatively overvalued, trading at a trailing 12-month enterprise value to EBITDA (EV/EBITDA) of 14.86x. This figure surpasses the broader industry average of 14.41x. It is higher than other major midstream companies such as Kinder Morgan Inc. KMI and Enterprise Products Partners LP EPD, which trade at 13.63x and 10.64x EV/EBITDA, respectively. This premium valuation reflects the market’s confidence in Enbridge’s prospects.

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However, such a valuation necessitates careful evaluation to determine whether it is supported by the company's fundamentals, growth potential and prevailing market conditions. A more detailed analysis is essential to reach a conclusion.

Building the Future: ENB’s Resilient Model & Project Pipeline

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.

Notably, 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 secures incremental cash flows from its C$26 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.

Image Source: Enbridge Inc.

ENB’s Strong Dividends and Growing DCF Enhance Appeal

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 6.5%, which is higher than the 5.3% of the composite stocks in the industry. 

Considering its substantial backlog of midstream growth projects, it is expected that Enbridge will continue to reward shareholders with attractive dividend payments. The company's distributable cash flow (DCF) for 2024 was C$12 billion, up from C$11.3 billion a year ago. This increase indicates that Enbridge is well-positioned to sustain and grow its dividend payouts.

ENB’s Renewables Growth & Prudent Capital Recycling

Enbridge sanctioned 1.2 GW of solar projects, with major contracts from Amazon, AT&T and Toyota. The completion of the Fox Squirrel facility (577 MW) strengthens its renewable footprint.

Also, the company sold assets worth $3.2 billion, including interests in Alliance and Aux Sable, helping optimize its portfolio while maintaining a healthy balance sheet.

Assessing ENB’s High Valuation

The positive developments have likely led to ENB’s premium valuations, as investors have high expectations for the company’s prospects and profitability. Consequently, they are willing to pay a premium for the stock, believing it will outperform its peers and the broader market in the coming months.

However, there are several uncertainties regarding the stock. Enbridge, a major player in the midstream energy sector, carries a high level of debt, with a debt-to-capitalization ratio of 59.6%, exceeding the industry average of 56.1%. This situation presents considerable financial risks.

Potential North American trade policy changes could also adversely impact Enbridge’s cross-border oil and gas flows, though management believes demand will remain robust. While Mainline volumes were strong, some assets, like ex-Gretna volumes, saw declines, highlighting pockets of weakness in Enbridge’s liquids transportation business.

The uncertainties surrounding Enbridge are likely reflected in its price performance, as the stock has gained 29% in the past year, trailing the industry’s composite stocks, which have surged 41%.

One-Year Price Chart

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Therefore, while the company’s long-term outlook is strong and some investors may be willing to accept the premium, caution is warranted given the concerns associated with the stock. Instead of rushing to add ENB, carrying a Zacks Rank #3 (Hold), it may be prudent to wait for a more advantageous entry point. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Enterprise Products Partners L.P. (EPD) : Free Stock Analysis Report

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

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