Insights

This High-Yield Dividend Stock Is Swimming in Cash

Cash is the lifeblood of a business. A company with too little cash will go out of business because it can’t sustain itself. A company with too much, however, has options.
Today, Enbridge (NYSE: ENB) is swimming in cash and looking for ways to put that extra money to work. Right now, management is defaulting to stock buybacks, but there are other options that could be even better for investors.
A giant cash flow machine
Enbridge is a Canadian company that operates in the energy sector. However, unlike an oil and gas producer, its financial results aren’t reliant on commodity prices. That’s because Enbridge operates a massive collection of pipelines, which help to move oil and gas from where they are drilled to where they get used. This is known in the broader energy industry as the midstream space, and, at least in Enbridge’s case, it is heavily fee-based.
Image source: Getty Images.

Essentially, Enbridge charges customers a toll for the use of its assets. This model allows the company to produce a reliable cash flow from its assets regardless of the volatility in energy prices. The key is demand, and demand has been strong for years. While the push toward clean energy is a long-term trend that needs to be addressed, the transition away from carbon fuels is likely to be a decades-long affair, so Enbridge’s business should continue to pump out reliable cash flows for many years into the future as well.
Right now, Enbridge believes it is producing roughly $2 billion in excess cash. It is looking for ways to use that money. What’s important, however, is that this is on top of the $3 billion to $4 billion it has earmarked for existing capital spending plans. This is really “extra” money it can use to enhance shareholder returns in new ways.
What’s Enbridge doing with that cash?
At Tuesday’s closing price, Enbridge sports a very generous 5.8% dividend yield. That dividend, meanwhile, has been increased annually for 27 consecutive years, making it one of the most reliable dividend payers on the market. While the company could push out more cash in dividends, it isn’t a priority, because the dividend is already so attractive.
That’s why Enbridge has been focused on stock repurchases this year. It currently has plans to buy $1.5 billion worth of stock on the open market. This is a way to give cash back to shareholders that doesn’t require on ongoing commitment like a dividend increase would. Essentially, shareholders benefit because there are fewer shares outstanding and, thus, earnings get spread over a smaller number of shares. 
Another use of cash that competes with stock buybacks is debt reduction. Although not as directly rewarding for shareholders, paying off debt strengthens the company’s balance sheet. That gives it more wherewithal to deal with adversity and the capacity to use leverage in the future should it find a good investment opportunity.
Which brings up the next two options: internal investment and acquisitions. Enbridge has a massive portfolio that provides ample capital investment opportunities. However, new things crop up all the time. For example, it is currently looking at using some of its pipelines for transporting hydrogen. If this clean energy source starts to take off, more internal spending could be in the cards. And that’s just one of many things the company is working on that could require additional cash. As for acquisitions, well, they are inherently lumpy and difficult to predict. However, if a good opportunity arises, there’s little doubt that Enbridge will step to the plate. And, with roughly $2 billion of extra cash floating around, it clearly has the capacity to do some deals.
Good things come to those who wait
All in all, Enbridge is swimming in cash and looking for the best ways to use it for shareholders. But management isn’t rushing into anything and is taking its time to ensure the money goes to good use. Right now, that means a focus on stock buybacks, but it has plenty of other roads it could go down in the future. For long-term dividend investors, that means you can get a fat yield right now and the benefit that comes from the company’s cash pile down the line. Exactly what a buy-and-hold investor likes to hear.
Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool has a disclosure policy. –

Cash is the lifeblood of a business. A company with too little cash will go out of business because it can’t sustain itself. A company with too much, however, has options.

Today, Enbridge (NYSE: ENB) is swimming in cash and looking for ways to put that extra money to work. Right now, management is defaulting to stock buybacks, but there are other options that could be even better for investors.

A giant cash flow machine

Enbridge is a Canadian company that operates in the energy sector. However, unlike an oil and gas producer, its financial results aren’t reliant on commodity prices. That’s because Enbridge operates a massive collection of pipelines, which help to move oil and gas from where they are drilled to where they get used. This is known in the broader energy industry as the midstream space, and, at least in Enbridge’s case, it is heavily fee-based.

Image source: Getty Images.

Essentially, Enbridge charges customers a toll for the use of its assets. This model allows the company to produce a reliable cash flow from its assets regardless of the volatility in energy prices. The key is demand, and demand has been strong for years. While the push toward clean energy is a long-term trend that needs to be addressed, the transition away from carbon fuels is likely to be a decades-long affair, so Enbridge’s business should continue to pump out reliable cash flows for many years into the future as well.

Right now, Enbridge believes it is producing roughly $2 billion in excess cash. It is looking for ways to use that money. What’s important, however, is that this is on top of the $3 billion to $4 billion it has earmarked for existing capital spending plans. This is really “extra” money it can use to enhance shareholder returns in new ways.

What’s Enbridge doing with that cash?

At Tuesday’s closing price, Enbridge sports a very generous 5.8% dividend yield. That dividend, meanwhile, has been increased annually for 27 consecutive years, making it one of the most reliable dividend payers on the market. While the company could push out more cash in dividends, it isn’t a priority, because the dividend is already so attractive.

That’s why Enbridge has been focused on stock repurchases this year. It currently has plans to buy $1.5 billion worth of stock on the open market. This is a way to give cash back to shareholders that doesn’t require on ongoing commitment like a dividend increase would. Essentially, shareholders benefit because there are fewer shares outstanding and, thus, earnings get spread over a smaller number of shares. 

Another use of cash that competes with stock buybacks is debt reduction. Although not as directly rewarding for shareholders, paying off debt strengthens the company’s balance sheet. That gives it more wherewithal to deal with adversity and the capacity to use leverage in the future should it find a good investment opportunity.

Which brings up the next two options: internal investment and acquisitions. Enbridge has a massive portfolio that provides ample capital investment opportunities. However, new things crop up all the time. For example, it is currently looking at using some of its pipelines for transporting hydrogen. If this clean energy source starts to take off, more internal spending could be in the cards. And that’s just one of many things the company is working on that could require additional cash. As for acquisitions, well, they are inherently lumpy and difficult to predict. However, if a good opportunity arises, there’s little doubt that Enbridge will step to the plate. And, with roughly $2 billion of extra cash floating around, it clearly has the capacity to do some deals.

Good things come to those who wait

All in all, Enbridge is swimming in cash and looking for the best ways to use it for shareholders. But management isn’t rushing into anything and is taking its time to ensure the money goes to good use. Right now, that means a focus on stock buybacks, but it has plenty of other roads it could go down in the future. For long-term dividend investors, that means you can get a fat yield right now and the benefit that comes from the company’s cash pile down the line. Exactly what a buy-and-hold investor likes to hear.

Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool has a disclosure policy.

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