Ratings have increased to what many call obscene levels. I’ve never seen such an expensive stock since the dot-com bubble burst.
Business model is resilient to recession
Embridge’s business model is as resistant to the forces of depression as possible. This doubles for companies in the energy sector that continue to push down valuations.
High levels of exposure to commodity prices have hampered Canada’s oil patch. However, the exposure of Embridge to these forces is minimal. The company’s business model is well isolated from these pressures. This is primarily due to high quality contracts with good oil producers, which secures earnings over the long term. Therefore, Embridge’s cash flow is very stable and should be done given the longevity and capital intensive needs of the asset.
If this recovery in oil prices continues for the next few years, I think Embridge can get a big boost. This is a great choice if you think you can’t keep oil prices so low, as this is a pure and very long-term holding. Many analysts point out the fact that oil is simply unproductive at these levels. Therefore, the poor supply and demand fundamentals of this sector have already begun to improve naturally. I think these macroeconomic powers will ultimately push commodity price rebounds to long-term equilibrium levels. This is broadly bullish for this sector and Embridge could be one of the biggest winners in such an environment.
Dividend stability is key to Enbridge’s investment treatise
One of the problems many investors are currently facing with Embridge is the company’s relatively high dividend yield. A dividend of about 8% focused on Canada’s energy patch should be captured with a grain of salt. Some investors trade stocks at these levels and simply set prices to reduce dividends. Pessimism about Embridge’s ability to continue to increase dividends is putting pressure on the stock.
That said, Joey Frenette, a fellow fool contributor I wrote recently: “Borrowing money to raise dividends or selling non-core assets can be risky proposals that can lead to long-term business decline. Dividends can remain the same, even if it means modestly lowering growth initiatives as headwinds continue, as shareholder-friendly management is hesitant to return to promises to raise dividends. “
I couldn’t agree anymore. After all, mid-single-digit to high dividend increases could go out of the window for the foreseeable future. That said, it’s very likely that this dividend will remain the same, which could approach the recent 3% pace.
Speaking of other great defensive names …
Ian Butler, a well-known Canadian investor, has nominated 10 shares for Canadians to buy today. So if you’re tired of reading about getting rich in the stock market, today may be a good day for you.
The Motley Fool Canada offers 65% off the list price of the best stock selection service, plus a full money-back guarantee on the amount you pay for the service. Click here for instructions on how to take advantage of this.
Stupid contributor Chris Macdonald There are no positions in any of the listed stocks. Motley Fool owns and recommends a stake in Enbridge.
The upcoming market crash is no match for this Canadian defense gem!
https://www.fool.ca/2021/01/10/the-upcoming-market-crash-is-no-match-for-this-canadian-defensive-gem/ The upcoming market crash is no match for this Canadian defense gem!