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Stock Strategist

Enbridge's Sell-Off Looks Exaggerated

The market is underestimating long-term cash flows once oil prices normalize.

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Wide-moat and 5-star-rated Enbridge (ENB)/(ENB) remains one of our top picks in the energy sector, as we think the market is mistaken about the future of the company’s cash flows. However, we don’t expect the market’s concerns will be fully addressed for some time, which can lead to volatile swings in the stock. We advise investors to stay the course while getting paid a handsome 8.4% dividend yield. In the end, we believe Enbridge’s long and winding road will lead to 40% upside.

Before the downturn in the financial and oil markets, we saw evidence that the stock market was beginning to appreciate Enbridge’s ability to generate long-term sustainable cash flows and offer a healthy, safe dividend. The stock appreciated nearly 25% from September 2019 until the beginning of the downturn in the markets in February. It also outperformed the general market and its top Canadian midstream peer, TC Energy (TRP)/(TRP), while closing in on our fair value estimate, which was $47/CAD 62 at the time. In our view, positive sentiment around the future of the Line 3 replacement project and the outlook for long-term oil sands supply growth drove the stock’s outperformance.

Joe Gemino does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.